Economic Outlook: Time for fundamentals

Markets looked mixed in Asia and Europe Monday following a week of strong numbers in U.S. markets after a three-week stall.

Perhaps regaining traction, the Dow Jones industrial average ended last week 377 points higher than the previous Friday. The Standard & Poor's 500 was up 46 points in the past five trading sessions.

Taking a longer look, stock of the 30 blue-chip companies on the DJIA rose 15 percent in the third quarter and 11 percent in the second. The S&P 500 turned in a 15 percent gain in the third quarter and has recorded a 58 percent run up since the March 9 low. The technology-dominated Nasdaq composite index rose 16 percent July through September.

How far does it go and how fast?

Tracking eight previous recessions, the S&P has taken an average of 1.9 years to return to previous peaks, The Washington Post reported Sunday. The range, however, is very broad. It took 83 days to climb back after the 1981-1982 recession and almost six years to return to the previous peak after the 1970s downturn.

The current comeback seems curiously ahead of fundamentals -- home sales appeared ready to turn around, but waited for historically low interest rates to push the market. Automobile sales, similarly, hit a flat bottom and refused to gain any traction until the artifice of a federal rebate -- the "cash for clunkers" program -- gave it a boost.

"I think we are entering into a period right now of 'Show me,'" Robert Millen, chairman of Jensen Investment Management, told the Post. "The market has bounced back dramatically. We're in a real critical period right now where the market's taking a breath and is now starting to pay more attention to fundamentals."

Fundamentals, ouch.

Similar to the rebate-motivated buying spree in automobile dealerships, fundamentals have looked suspicious lately, like the 1.3 percent August rise in consumer spending that, again, was traced to one-time federal help.

Straight out of the horse's mouth, the market rally has been strongest in stocks that took the heaviest beating in the downturn. Banks in the third quarter gained 25 percent; construction, automakers and hotels -- in the category of discretionary items -- climbed 19 percent. Companies that rely on defense contracts, energy companies and everyday necessities rose 5 percent to 10 percent, the Post said.

That hardly points to a flawless recovery. After 25 banks failed in 2008, this year's failures number 98 with two and a half months of the year left.

Sheila Bair, head of the Federal Deposit Insurance Corp., recently said "commercial real estate is starting to eclipse mortgages" as a primary trouble spot for the nation's banks. In addition, many commercial borrowers are having recession-oriented troubles of their own and will be looking to refinance their deals in an environment of very tight credit.

In Japan, the Nikkei 225 index was closed for a holiday Monday. The Shanghai Composite index in China fell 0.59 percent. Hong Kong's Hang Seng Index fell 0.93 percent, while Australia's S&P/ASX 200 slid 0.28 percent. The Kospi index in South Korea fell 0.4 percent. The Sensex in India rose 2.31 percent.

In midday trading in Europe, the FTSE 100 in Britain rose 1.2 percent, while the DAX 30 in Germany gained 1.56 percent. The CAC 40 in France climbed 1.39 percent, while the DJ Stoxx 50 added 1.24 percent.