Why am I saying that the median home prices in the stronger markets (i.e. the South Bay region of Los Angeles) is near a bottom? It is because the stock market is telling me so. The stock market charts allow you to see the investor sentiment. Investors speculate about the future and go "long"--which means buying shares of stock--if they think the share price is going up. They will go "short"--which means selling shares of stock--if they think the share price is going down. The investor sentiment can be seeing by looking at the trend in stock market price to see if investors are long (or "bullish") or short (or "bearish"). It is generally said that the stock market will bottom out and start improving six to nine months before the general economy, so this is a way to fortell the future--but this is not an exact science.
Before looking at the stock market, let's look at the overall picture of the economy. A general measure of the economy is the GDP--Gross Domestic Product--which is "the output of goods and services produced by labor and property located in the United States." The GDP is reported quarterly and is in comparison to the previous quarter. If the GDP number is positive, it means that economy expanded compared to the previous quarter. If the GDP number is negative, it means that economy contracted compared to the previous quarter. The chart below plots the GDP report from 1947 when they started to track it.
It's just a squiggly line! Well, the key to reading the chart is to see when the GDP is above zero (expanding) or below zero (contracting). You can see that the magnitude of the squiggles since around 1985 is much more orderly compared to the previous time period indicating that the government is paying attention and controlling it so it won't get too far out of control--preventing sky rocketing growth and bone crushing contractions. You will notice that the GDP stays above zero for most of the time--when times are prosperous. It is only occasionally that the GDP falls below zero which signals a contracting market and possibly a recession like we are in now. The GDP for Q4-2008 was -6.3% and for Q1-2009 was -6.1%. The current contraction is near equal to that in 1982 and only beat by the contraction in 1980 and 1958. In other words, the current recession is a pretty bad one considering all the history we had.
Before looking at the stock market, let's look at the overall picture of the economy. A general measure of the economy is the GDP--Gross Domestic Product--which is "the output of goods and services produced by labor and property located in the United States." The GDP is reported quarterly and is in comparison to the previous quarter. If the GDP number is positive, it means that economy expanded compared to the previous quarter. If the GDP number is negative, it means that economy contracted compared to the previous quarter. The chart below plots the GDP report from 1947 when they started to track it.
It's just a squiggly line! Well, the key to reading the chart is to see when the GDP is above zero (expanding) or below zero (contracting). You can see that the magnitude of the squiggles since around 1985 is much more orderly compared to the previous time period indicating that the government is paying attention and controlling it so it won't get too far out of control--preventing sky rocketing growth and bone crushing contractions. You will notice that the GDP stays above zero for most of the time--when times are prosperous. It is only occasionally that the GDP falls below zero which signals a contracting market and possibly a recession like we are in now. The GDP for Q4-2008 was -6.3% and for Q1-2009 was -6.1%. The current contraction is near equal to that in 1982 and only beat by the contraction in 1980 and 1958. In other words, the current recession is a pretty bad one considering all the history we had.
The chart above just shows the GDP for the last six years. You can see that Q4-2008 and Q1-2009 was a significant drop. In Q4-2008, the GDP contracted -6.3% compared to Q3-2008, and then again -6.1% contraction between Q4-2008 and Q1-2009. So, the economy bottomed out in Q1-2009 right? Not exactly.... If you compare Q3-2008 versus Q1-2009, you can say that the economy contracted a total of -12.4% (this is not exact as there is a compounding affect). In order for the economy to have bottomed out, the GDP number will have to reach above zero and go into positive territory. The US recession started in December 2007 and that was announced a year later in December 2008--it took the economist a year to figure out that things were already bad!
The GDP for Q1-2009 was released yesterday, April 29, 2009. The concensus was -5.0%--which means everybody expected the GDP report to come in at -5.0%. But, the GDP number came in at -6.1% which is significantly worse (22% worse!) than people expected. This is considered very bad news and usually causes the stock market to fall dramatically. But, the stock market rallied instead...
The chart above is a chart of the S&P 500 which is generally considered as the representation of the overall stock market. The green arrow in the chart above points to April 29, 2009 when the Q1-2009 GDP number was reported. Since it was a very bad news, I expected the stock market to fall but the market all but ignored the bad news and rose and even broke a significant resistance level at 874 that it has been trying to break for nine days. You can see that the stock market hit a near-term bottom on March 6 and has been rising since. The S&P index is over 30% higher than the March 6 bottom, so you can say we are already in a "bull market" which has a technical definition of 20% rise from a near-term bottom. Note the number the S&P 500 hit at the bottom--"666." From the calling card, you all can tell who was causing all this problem! But, there are still many investors who expect the stock market to fall even further than the March 6 bottom before really going up.... But when the stock market shrugs off such news as a very bad GDP and keeps rising, you gotta know that the stock market sentiment is "looking up" and that the end to the current recession is near.
James
http://jamesmakishima.com/
http://twitter.com/JamesMakishima
The GDP for Q1-2009 was released yesterday, April 29, 2009. The concensus was -5.0%--which means everybody expected the GDP report to come in at -5.0%. But, the GDP number came in at -6.1% which is significantly worse (22% worse!) than people expected. This is considered very bad news and usually causes the stock market to fall dramatically. But, the stock market rallied instead...
The chart above is a chart of the S&P 500 which is generally considered as the representation of the overall stock market. The green arrow in the chart above points to April 29, 2009 when the Q1-2009 GDP number was reported. Since it was a very bad news, I expected the stock market to fall but the market all but ignored the bad news and rose and even broke a significant resistance level at 874 that it has been trying to break for nine days. You can see that the stock market hit a near-term bottom on March 6 and has been rising since. The S&P index is over 30% higher than the March 6 bottom, so you can say we are already in a "bull market" which has a technical definition of 20% rise from a near-term bottom. Note the number the S&P 500 hit at the bottom--"666." From the calling card, you all can tell who was causing all this problem! But, there are still many investors who expect the stock market to fall even further than the March 6 bottom before really going up.... But when the stock market shrugs off such news as a very bad GDP and keeps rising, you gotta know that the stock market sentiment is "looking up" and that the end to the current recession is near.James
http://jamesmakishima.com/
http://twitter.com/JamesMakishima
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