How Do You Spell Relief? R-A-L-L-Y!

I walked into the office yesterday morning thinking, that having the S&P 500 down 17.3% year-to-date does not make for a happy Wednesday for most people. I actually felt pretty good because our portfolios have been able to weather the storm pretty well. Still, most clients are down, so telling Mr. Jones that he is down “only” 6% still means that he is in a bad mood.

The only thing that could provide a bit of relief for every Mr. and Mrs. Jones out there was a stock market rally and boy, did we get a reprieve yesterday! Led by the beleaguered financial sector, the Dow Jones Industrial Average leapt 276.74 points, or 2.5%, to 11239.28 and the S&P 500 also soared 2.5% to 1245.36. The S&P 500 financial sector finally shot up after five consecutive down days in which it sagged 16.4%, leaping 12.5%. Bank of America skyrocketed 22.4%, Wells Fargo shares soared 32.8%, Lehman Brothers, which had been on “death watch” gained 20.6%, while troubled GSEs Fannie Mae and Freddie Mac rose more than 29% each. (Although the NASDAQ is not filled with financial companies, it too enjoyed the day’s bull run, rising 3.1% to 2284.95.)

What made investors go on a buying binge yesterday? The early economic report that grabbed headlines was the June Consumer Price Index, which jumped 1.1%, the second-biggest rise since 1982. Obviously the inflation news was not exactly good news, but the core number was close enough to expectations that investors did not get too worried. Other news included the Securities & Exchange Commission’s announcement that it was moving to curb short sales, which might have spurred a short-covering rally. Then there was the release of the FOMC minutes from the June 24-25 meeting, which detailed an internal discussion about what to do going further, which led many to believe that the Fed will not act any time soon.

The oil market helped to provide relief to investors. After falling $6.44 on Tuesday, light, sweet crude for August delivery settled $4.14, or 3%, lower at $134.60 a barrel on the New York Mercantile Exchange. Crude oil futures have dropped $10.58, or 7.3%, over the last two sessions on concerns that a prolonged economic downturn in the US and Europe will create demand destruction that can not be overcome by slowing Asian economies. For months, oil has been the main driver for almost every asset class so it stands to reason that a pull-back would provide the opportunity for investors to reconsider their overly bearish bets.

In the end, the main catalyst for a day like yesterday may be relief as much as any data points. The market has been weighed down by overly negative sentiment, which needed to be corrected. Of course one day does not make a trend, but after the past six weeks, investors enjoyed the respite of a spring-back in stock prices. Now we need to see whether follow through ensues or if we are doomed to stay mired in a downtrend. For now, you can spell relief with R-A-L-L-Y.