The stock market has continued to rally in spite of very troubling fundamental and economic news.  This is a good reminder to investors that at some point, bad news becomes priced in and we should no longer fear the potential of bad news on price.  In fact, stock prices can and have moved up into bad news, consistent with past economic recoveries where the market leads.

As we move to the higher 1000-1100 range on the S&P 500, however, the ability of the markets to see past difficult economic news becomes harder to bear.  This is why we’ve preferred buying on weakness rather than chasing strength.  If you like two companies equally over the long run and one is down 10% and the other is up 10% on the day, close your eyes and buy the former.  At least that’s what we’ve been trying to do.

In other news, the House of Representatives passed a bailout bill for the auto industry but it is likely going to get tied up or turned down in the Senate.  Speaking of autos, I’ve really been amazed at how cheap it is to fill my car with gas these days.  In reviewing my annual budget, I spent about 4% of the total on gas last year.  The good news is that this year, if prices stay down, I’ll free up more than 50% of that allocation for other things.  I also read this morning that global oil demand will fall for the first time in twenty five years.  Wow.

Jobless claims for the week were 573,000, higher than expected and consistent with a 7% unemployment rate for December.  Most economists expect unemployment to peak in the 9-10% range during this cycle.  Using unemployment as a fulcrum for the market, I think it’s highly likely that we’ve seen the lows in the market as long as those peak expectations of 9-10% hold.  This doesn’t mean that we won’t retest the lows, only that we won’t likely break to new lows.  

The key to improving market sentiment has likely been the Fed’s decision to target mortgage rates.  The 30 year hit 5% yesterday in some places and many expect that the Fed would like to see them get to 4.5%.  Like lower oil prices freeing up cash for other areas of one’s personal budget, refinancing at lower rates will do much the same thing.  The big unknown, however, is how many folks will qualify for refinancing given that home appraisal values have likely fallen and for some, so have incomes in the face of economic softness and rising unemployment. 

I personally plan to wait another two weeks to see if rates fall further to where refinancing might make personal economic sense.  I just put a note in my calendar to call my mortgage guy in two weeks.