Bad news is good news
The market's showing some tentative signs of recovery despite more gloomy economic and corporate news. Is that a good sign?
NEW YORK (CNNMoney.com) -- Maybe traders really want to get to the beach. How else to explain the action on Wall Street this week?
After flirting with bear market territory Tuesday morning, yesterday's afternoon rally was sparked by, of all companies, General Motors (GM, Fortune 500).
The fact that sales fell only 18% in June instead of the expected 25% was enough to push GM's stock up 2% (it was up as much as 15% at one point) and send the Dow higher for the day.
And take a look at what's happened with some other stocks reporting grim news this morning.
Shares of Starbucks (SBUX, Fortune 500) were up more than 1% even though the company announced on Tuesday it was shutting about 600 underperforming stores and scaling back its expansion plans due to weakness in the economy.
Health insurer UnitedHealth (UNH, Fortune 500) slashed its earnings outlook for 2008 this morning and also announced it was paying more than $900 million to settle class action lawsuits against the company regarding prior stock options practices. The stock shot up about 5.5% at the open.
And overall, stocks rose slightly Wednesday morning despite a key precursor to tomorrow's labor report, the ADP National Employment Report, showing a bigger loss than expected in private-sector jobs. (Stocks later gave up those gains in mid-day trading as oil rose and the dollar weakened.)
So what gives? Are investors finally starting to think that it won't get much worse or are they simply delusional?
On the one hand, it's reasonable to wonder if the market is simply oversold and due for a bounce following the brutal June on Wall Street.
Also, it's not as if all the news has been bad.
Two big European banks, UBS (UBS) and Deutsche Bank (DB), have said in the past two days that they won't need to raise more cash to deal with the credit crisis. That may help ease fears about how much worse it will get for big U.S. banks.
What's more, the Department of Commerce reported this morning that factory orders rose 0.6% in May, a touch higher than the 0.5% economists were expecting.
Still, stocks may need to take a further dip before we can declare the worst of the recent market turmoil over. As I pointed out in Monday's column, earnings estimates for the second quarter and remainder of the year may still be too high.
That means once companies start reporting their results later this month, investors could be in for a bit of a shock.
Nonetheless, now is not the time for the average investor to panic. If anything, it's time to be opportunistic, especially if there are more dips. Believe it or not, there are companies that are holding up well even in this gloomy economy.
This morning, for example, discount retailer Family Dollar (FDO, Fortune 500) reported better-than-expected earnings for its fiscal third-quarter ending in May. The company added that sales in June were ahead of targets in part due to consumers spending some of their tax rebate checks.
In fact, as consumers become more cost-conscious, that has helped other bargain-oriented retailers as well. Wal-Mart (WMT, Fortune 500) was the best-performing stock in the Dow in the first half of the year while closeout merchandise retailer Big Lots (BIG, Fortune 500) was one of the top performers in the S&P 500.
So as bad as things seem right now, there is some cause for investors to at least express some cautious optimism.
Issue #1 - America's Money: All this week at noon ET, CNN explains how the weakening economy affects you. Full coverage.
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