Will the Ultimate Relief Rally Continue?

McSherry is SVP of Strategic Initiatives at Cuttone & Company.

Early in his life, while working as a war correspondent covering the Second Boer War, 24-year-old Winston Churchill was accompanying British troops aboard an armored train reconnaissance that was wrecked and derailed by Boer guerrillas.

Churchill was captured and interred in a P.O.W. camp from which he dramatically escaped several months later. His three hundred mile journey behind enemy lines to freedom turned him into a world celebrity and helped propel him to a seat in Parliament after the war’s conclusion.

Afterwards he recalled in London to Ladysmith via Pretoria, his book of collected war correspondence:

“nothing was so thrilling as this: to wait and struggle among these clanging, rending iron boxes, with the repeated explosions of the shells and the artillery, the noise of the projectiles striking the cars, the hiss as they passed in the air, the grunting and puffing of the engine--poor, tortured thing, hammered by at least a dozen shells, any one of which, by penetrating the boiler, might have made an end of all--the expectation of destruction as a matter of course, the realization of powerlessness, and the alternations of hope and despair--all this for seventy minutes by the clock with only four inches of twisted iron work to make the difference between danger, captivity, and shame on the one hand--safety, freedom, and triumph on the other.”

Usually paraphrased as “There is nothing in life as exhilarating as being fired upon without effect,” Churchill’s description of the adrenaline rush of near disaster giving way to the triumph of survival rings true with those who have served in battle and it appears that consumers are experiencing a similar sensation.

After a period in which the public was offered little but blood, sweat, toil and tears, hope has returned to the national discourse, as reflected in the dramatic leap in consumer confidence that was noted in the most recent report. After several months of being pinned down in foxholes with economic bombshells bursting all around, consumers have emerged to fill their lungs with sweet spring air and are feeling the elation that accompanies escape from a near-death experience.

Traders have noticed and have been bidding up the market in recent weeks despite signs that the housing market is still cratered and unemployment has yet to peak.

Unfortunately, developments on the macro front haven’t quite given the same cause for celebration. In recent months the dollar has weakened on inflation worries and the repatriation of capital by foreign investors who no longer feel the need for a safe haven.

That decline has put upward pressure on energy and commodity prices and has the potential to put a crimp in recovering consumer spending patterns. In response to those pressures, a recent series of hawkish statements by Fed officials seemed to have been coordinated to counter those concerns and ironically, North Korea’s latest display of nuclear intransigence may have unwittingly helped the Treasury float a portion of this week’s massive debt offering by prompting investors to reconsider the risks associated with moving money back overseas.

Even though continued North Korean sabre rattling could potentially help stabilize the dollar and modestly ease short-term inflationary pressures (how crazy is that?), long-term concerns are lurking just beneath the market’s surface. As if in confirmation of those fears, the most recent government bond auction, waves of selling hit 10-year Treasuries in afternoon trading, dramatically steepening the yield curve as traders acted upon doubts regarding the administration’s ability to fund the burgeoning national debt.

A sell off in stocks followed and the market gave back nearly all of the previous day’s gains. A decidedly unsettled air lingered over the close and traders departed for home amid prospects of an anxious night’s sleep.

So where does that leave us? Corporate earnings in the first quarter exceeded drastically lowered expectations, primarily due to aggressive cost cutting and it is unclear if newly emboldened consumers will deliver revenue gains once the euphoria of survival dissipates.

Rising gasoline prices have the potential to put a crimp in household spending plans and could negatively impact retailers and travel-related businesses. Capital spending has yet to recover and businesses appear reluctant to step up investment until the all-clear siren has been sounded. Despite all those negatives, it may be that the market is sending just such a signal.

Stocks have shrugged off an awful lot of bad news in recent weeks and they’ve risen despite the expectations of the overwhelming majority of professional investors. There is reason to believe that sidelined cash positions have been moving in to support and extend the market gains and if trend continues, traders may decide to load up for an old-fashioned summer rally.

After all, it may not turn out to be all that complicated. Just as the negative feedback loop of rising unemployment, mounting foreclosures and declining home values helped drive stock prices lower, so too can a positive feedback loop lift the market. A rising market helps fuel a rise in confidence, which leads to higher levels of spending which leads to...

Well, you know the rest.

Households have emerged, blinking from the bunker, and as long they don’t succumb to survivor’s guilt, they could lead the way in healing the economy. The monetary authorities have been holding things together in hopes that spending may revive, yet despite a Herculean effort the outcome still remains in doubt.

Treasury and the Fed have been fighting on the beaches, in the air, on land and sea against the loss of confidence engendered by the Panic of ’08. While significant doubts continue to be expressed about the tactics that they have chosen, it must be conceded that they are dealing with a banking crisis the likes of which haven’t been seen in three quarters of a century and progress appears to have been made.

If our leaders ultimately succeed in putting the U.S. and global economies back on the path to prosperity, we will surely look back one day and conclude that this was their finest hour.

About the Author

McSherry serves as senior vice president of strategic initiatives at Cuttone & Company, where he is a member of the management committee involved with strategic planning and market strategy. He has served in a number of leadership positions within the Industry and has chaired several New York Stock Exchange committees, including the Equity Traders Advisory Committee. He was also a member of the Market Performance Committee and served as a New York Stock Exchange Governor for six terms. He is a past President of the Alliance of Floor Brokers, an industry trade group and is a member of both the Security Traders Association of New York (STANY) and the National Organization of Investment Professionals (NOIP).

McSherry began his career as an institutional options trader, working on the American Stock Exchange in the early 1980s. He founded McSherry & Company in 1988, eventually growing it into one of the largest independent brokerage firms on the floor of the NYSE. In 2000, McSherry & Company was acquired by SunGard Global Execution Services. Mr. McSherry served as CEO of its New York and London-based Broker Dealers for two years following its acquisition. He then joined Prudential Equity Group and held the position of Head of Sales Trading and NYSE Operations before joining Cuttone & Company in 2007. Mr. McSherry is a regular commentator on CNBC and other media outlets.