by Bruce Fenton

After this past week I feel like I have just enjoyed a great meal followed by two helpings of rich dessert…with no guilty feeling. A stock market with four up days in a row…NASDAQ up 8% for the week…is life good or what?

We have not been treated to a NASDAQ performance like that in more than seven months. This raises two questions: Is this the end of the Y2K Bear Market, and if so, why the turnaround? To answer the latter, do what any good forensic accountant or detective would do…just follow the money.

The money behind this rally is coming from consumer spending. Retail sales continue to show strong month-over-month gains. April was up 1.2% over March, better than the .6% expected by most analysts. Consumers, the lifeblood of the economy, are driving the economic recovery from the shallow recession of last year by keeping their pocketbooks and wallets open.

Economists, a perpetually skeptical lot, continue to be amazed at the strength of the consumer spending patterns as the recovery grinds on. I fear too many of the practitioners of that dismal science have trouble seeing the forest for the trees.

The consumer is still spending because: A) the largest demographic age bulge of consumers…those 35 to 50…are reaching their peak spending years; B) these consumers have money to spend because they have good, well-paying employment; and C) inflation is in check and interest rates are down, so prices are attractive.

The Federal Reserve held off tampering with interest rates, since data continues to show that inflation risks remain contained so far. Higher productivity from the nation’s work force has helped keep labor costs in check and prices low. This should allow interest rates to remain low as the economy begins to accelerate.As productivity goes up and labor costs go down, business should be able to increase profits. If the profit picture continues to improve and we have no more surprise accounting scandals, maybe we can get a few quarters in a row of increasing earnings…something that should pull stock market bulls out of the barn and into the pasture.

As to whether this is the end of the Y2K Bear Market, I believe it is too early to tell. The signs are all positive, but the stock market is Darwinian in its grinding, relentless march to drive excesses from market valuations. In the process, at some point investors who bought stocks for the wrong reasons in 1999 and 2000 will realize that the pain of holding is greater than the pain of selling. When they are gone, the market will take off and leave behind those who think it will never recover.

From the ashes of the past two years there are some lessons for all of us. First, as a lot, we are not as smart as we were several years ago when an investor could pick any stock and make a little money. That investor still can, but it is now a real stock picker’s market…throwing darts doesn’t work!

Second, real companies with real businesses and real earnings, while their stock will fluctuate with market sentiment, continue to provide sound investment opportunities.

Finally, the consumer is king! As long as he has money and the propensity to spend, our economy will be fine. The great Bull Market that began in 1982 will continue its march, upward and to the right, until the consumer says “Stop.” Keep your eye on the money.

Bruce Fenton is a financial consultant, a writer, and the president and founder of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.