Have you seen or heard anything in recent months that points to a near-term improvement in the economy? I haven’t. The economic news in this period has been uniformly awful. Bankrupcies and foreclosures continue to soar. Job losses mount at a frightening rate. Consumer and business confidence keeps plunging.

So why has the stock market gone up 16 percent since the end of November? The answer, of course, is that we’re seeing a faith-based rally.

Three main strands play into this rally. The first is the history argument. Some economists look at the steep drop in stock prices during most of 2008 and note that markets in the past have bounced back the year after similar slides. They therefore conclude that history is likely to repeat itself.

And yes, history does, in fact, repeat itself. The problem with making this tendency a guide to the future is that “history” isn’t a single series of events. History is really lots of different histories, and one is free to pick and choose which will be repeated with respect to almost anything—such as market behavior. People who invest now based on the hope that one particular repetition will occur (one they happen to like) are simply acting on faith.

Another rationale for believe that a stock rally is warranted is also based on the past. The observation here is that the market always seems to improve dramatically before the economy actually perks up. The fact that the market is rallying now therefore indicates the economy will follow and the rally itself is justified.

This argument not only puts the cart before the horse, it puts the cart before the horse that puts the horse before the….well, you’d have to ask a Wall Street strategist to work this one out completely. Just remember to leave your wallet with a friend before you go in for a consultation

The primary basis for thinking the economy is destined to turn around soon and justify recent stock gains, however, is Obama’s announced government spending plans. As currently described these are more populist in tone than the Paulson bailout-a-bank-and-hope-for-a-trickle-down approach. A nice improvement, perhaps, but it still just involves using money that the government doesn’t have to make up for market assets that never really existed.

There are all kinds of other reasons to think that an economic turnaround is not imminent and that a market rally now is purely faith-based. But, hey, I, too, saw “The Wizard of Oz” when I was kid. Several times, in fact. So who knows? Maybe if we all click our heels together in unison and close our eyes and wish very, very hard for good times to come again, maybe, just maybe, just maybe, just maybe…..
(This writer’s new book: http://www.the14thcolony.com)