I think this has become a common refrain in the Wall Street community, the financial media and punditry corps. They continue to puzzle about the S&P and Dow breakouts to new all-time highs. How can this be with such high unemployment, weak jobs growth and a generally sluggish economic backdrop? Well, that is the way great markets generally begin, with people arguing forcefully against their right to exist.
One of the financial segments on CNBC (5/9) featured a comment about a just-issued pronouncement from S & P. You remember S & P, it was their superb credit analysis and bond rating capability that saved us from the “2008 Market Crash.” Oops, oh no, we had that crash. Didn’t we? Any way the talker–in-charge made the statement with as much gravitas as he could muster that “S & P has said,’ Once this wave (upturn in the market) ends, which we expect will be fairly soon, we look for a pullback of 8% to 10% to develop ‘.” Well, the market has had a nice run and certainly could correct this much or more. But really, this is not news and based on recent history, S & P may not be the most credible source, period.
One of the other commentators made the point that the market has been up 56 out of the last 88 trading sessions with no meaningful correction. Another said that because we are now up over 20% since the November 2012 lows, we have entered a Bull Market. What would you call the move from March of 2009 (S&P 660) to present a SUPER Bull Market? This inane drivel is not atypical for the financial media.
Back to the subject (I don’t get it), the media has long been non-plussed by this run-up. They cannot figure it out the strength, in fact, they have been arguing with any up-movement in the market since the turn in ’09. How could they have been so wrong, so long?
I see their problem to be the continuing focus on the recent past, where we have come from in the last six months, rather than the longer term. The market, vis a vis the S & P, has been flat for the last 13 years. You could have pulled your money out in March of 2000, put it in a CD and been well ahead of the game. Meanwhile everything about the market’s valuation, the balance sheets underlying corporate America and investor sentiment has improved. I say sentiment has improved because we’ve gone from a market where people loved stocks to one where people totally distrust stocks.
The last time in my career that I saw anything like this was the 16-year period between 1966 and 1982. You could have sold the Dow at about 1000 in 1966 and been in CDs until it finally broke above 1000 in 1982, and you would have done quite nicely. Of course, there were great fluctuations in between and a trader might have made a fortune, but I’m not a trader. Of some interest, when the Dow did break out of that sixteen year trading range, it moved up 170% in the next five years and 1000% in the next eighteen years.
Most importantly and why I am relating this piece of history, is that the reaction of the media, punditry and Wall Street to the 1982 breakout was exactly the same. Nobody could understand why the market was doing so well in light of the fundamentals (then stagflation, high unemployment (10%+) and 15% to 20% interest rates on U.S. government securities). Back then Fed policy was fighting inflation. Today the battle is against deflation.
Today as then, nobody is giddy or exited. Everyone is scratching their heads and cannot understand why stocks are doing so well in light of the current fundamentals—high unemployment (7.5%?), a sluggish economy (2.5 to 3% GDP growth), geopolitical concerns, the Eurozone mess and Asia (China) slowing, Washington gridlock.
The only thing people can come up with is Q.E., which most are critical of. This is ironic since the 1982 breakout was fueled by then-Fed-Chair Paul Volker’s attempt to slow inflation (kill the economy) by stomping on the breaks with ultra high interest rates. Ben Bernanke now has rates in the cellar in an attempt re-accelerate the economy and keep us from disinflation.
The point I am trying to make is that we have been here before and the reaction is always the same…dire skepticism. Past performance is no guarantee of future results, but I believe that we can learn from history. When most people can understand why you should own stocks (a la 2000), you probably should see their enthusiasm as a good reason to hit the exits. Now, as most people and the media can’t see why you should be involved in the market, it is probably okay to be involved. As Mr. Buffett says, “You should be greedy when others are fearful, and fearful when others are greedy.”
What do you think?
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