The Stealth Rally

Has anyone noticed the stock market rally besides Kudlow and Cramer? Since mid-March the Dow has put on around 1300 points or 17%, and shows no signs of letting up. The Nasdaq has gained even more. Actually things started to look better late last year when the high-yield (junk) bond market, which had been dramatically discounted due to the recession and corporate scandals, began to rally. Junk bonds, loans by less-than-completely-healthy corporations that perform more like stocks than ordinary bonds, have ceased their torrid ascent since Warren Buffett recently said that he wasn't buying them anymore; but they have remained stable, and the stock market has continued where they left off.

The bad news is that there is talk about deflation, the Federal Reserve seems poised with it's finger on the easing trigger lately, and Treasury notes have rallied yet again (perhaps accomplishing the Fed's task for it) sending their yields down to previously unheard-of lows (around 3.4% for the 10-year note). So the highest quality and safest investments (U.S. Treasuries) have rallied as hard as some significantly lower quality ones (junk bonds), making it very difficult to figure out if investors are pessimistic or optimistic.

Now we are not financial advice-givers at Innocents Abroad. Nor do we ever deem economics to be more serious or fundamental than politics. But we can't help but notice that Americans often vote with their pocketbooks and that the recent stabilization of the stock market (if we can call it that) would seem to bode well for George Bush in 2004. Sure, retirees finding it difficult to secure attractive yields on fixed income in order to supplement Social Security and pensions with interest from savings may not benefit much from a better stock market. But the rest of the country generally will. The economy was the elder Bush's Achilles heel, but it may yet become a strength for the younger Bush.

There hasn't been much discussion in the media yet about the recovering economy, though, to be fair, the jury is still out. The market has rallied nearly to these levels before only to decline again. Nevertheless, this time the rally may stick. That would be very bad news for Democrats, as it would signal a general economic recovery which (along with the international situation) would prevent them from launching another "It's the economy, stupid" campaign. Let's see if other media outlets besides Kudlow and Cramer start discussing a recovery when it happens. K and C is already credited with spurring the tax-cut on dividend distributions; and although Kudlow, much more than Cramer, is usually more bullish than is warranted (maintaining his optimism throughout the wretched stock market decline), their show is shaping up to be one of the smartest on television.

William F. Buckley, Jr. these two are not, with their loud suits (and voices) and sometimes superficial treatment of issues. They often make me miss Firing Line. Nevertheless, and despite Cramer's party affiliation, the show can be trusted to present the conservative case reasonably well on most issues. You can be sure to hear all about the recovering economy when it happens on K and C.