Don't Be a Hater

What a great rally that was yesterday.

"Extreme pessimism? Let me introduce you to slightly improved economic data."

I believe that pretty much sums up yesterday's powerful move higher.

Manufacturing data came in better than expected. Along with Tuesday's improved consumer confidence number and good news from emerging markets, it was enough to offset a disappointing early read on employment from ADP.

I understand fully that individual investors are highly skeptical of the stock market right now. But yesterday's action should show what the potential of the stock market is, once economic data improves.

I also think individual investors should set aside some of their skepticism and start focusing on the positives of the economy rather than the negatives. I know, I'm probably asking a lot...

It's myperception that investors hate everything right now. We hate Congress, we hate the administration, we hate banks, we hate CEOs, the Fed and anybody else who has anything to do with the economy or the stock market.

I'd also like to suggest that so much hate isn't good for the psyche. And it certainly won't be good for one's portfolio as the U.S. economy slowly improves.

We saw the same dynamic when the stock market rallied off the March 2009 lows. Individual investors were slow to abandon their bearish stance and missed some hugely profitable opportunities.

I sympathizewith the frustrations directed at our political leadership. And I came across a great article that sums up the situation better than I have. It's from Pete Morici, who, last I knew, was an economics professor at the University of Maryland. This article comes from TheStreet.com. Give it a read and let me know what you think: ianwaytt@wyattresearch.com

Now, gettingback to the rally, investors should be aware that yesterday's move was led by financials and energy/materials stocks.

This is as it should be, and as I suggested it would be on Monday. Despite the continued anger at banks and the skepticism surrounding their financial health, it is the banks that must lead economic growth and a stock market recovery.

That's because the U.S. economy is driven by credit and lending. Even though we know that banks have been reluctant to lend as they continue to hoard cash to improve their balance sheets, those balance sheets are improving. And lending will improve.

In the second quarter, banks reported their best earnings ($21.6 billion) since the third quarter of 2007. Please note, too, that earnings improvement is being driven by the big banks. Smaller, regional banks are still suffering. The FDIC's list of problem banks rose from 775 to 829 in the quarter. And if you pay attention to bank closings, which typically occur over the weekend, then you know that small banks are still being closed.

I know that Daily Profit readers might prefer to invest in regional banks, but that's simply not the way to make money right now. Stick with the big banks until the economic rebound gets stronger.

America's retailers had a better than expected August. And analysts are already talking about a weak Christmas shopping season. It seems a little early for that. Especially since savings rates are up.

It's also a little early for me to start the "never underestimate the American consumer" refrain, but what the heck.