Economy Up, But Not Stocks Yet
Breathe easy, people. The Dow’s 179-point gain on Tuesday means we won’t suffer through another Great Depression. The market’s move well into the positive signaled the formation of a long-awaited floor in the economy, Cramer said. So banish visions of even greater unemployment and soup kitchens from your head.
But a floor in the economy doesn’t equal a bottom in stocks. That’s the catch. Share prices won’t head straight up from here. One important thing needs to happen before stocks start their rebound.
Of course, pockets of strength are popping up across the market. Retail sales were better than expected in February. Housing starts also rose that month. Commodities are up. Banks are reporting profits. As a result, companies like Amazon.com , Freeport-McMoRan and Toll Brothers rallied. And banks like Wells Fargo, Bank of America and Citigroup finally bottomed.
Also, the Federal Reserve’s Term Asset Backed Securities Loan Facility, or TALF, should jumpstart the securitized-loan market, encouraging those banks to lend more. The stimulus is kicking in. Mergers and acquisitions are picking up. And unemployment seems to have leveled off. This good news will most likely continue, Cramer said, as long as President Obama and his administration keep spreading a pro-business message.
But – and this is an important but – stocks won’t follow the economy until earnings estimates come down. They’re still way too high. And that’s across the board: steels, oils, housing, aluminum, travel, infrastructure, insurance and tech. Look, Illinois Tool Works cut its estimates yesterday, and today Nucor reversed its first-quarter guidance from profits to a loss.
The estimates have to be low enough to beat, Cramer said. The Nasdaq’s 2003 bottom happened the same way. So until that happens we might get false bottoms, but no real turn. And we can forget about making a serious move above Dow 8,000.
Cramer's charitable trust owns Freeport-McMoRan and Wells Fargo.
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