Copyright (c) 2009 Scott Cole
I've been away for awhile. Sometimes it is good to just take a break from the markets to clear your head. Plus, I have been working on another business venture. Time to look at the markets again.
When this current move began last month, we were overdue for a rally. Sentiment was clearly too negative. Now, Wall Street sentiment seems to be a bit more positive. The question is, do we really have reason to be more positive?
Earnings reports out thus far have generally beaten expectations. But, these expectations were based upon a scenario where the economy was going to fall off a cliff. It has not done that, and I don't expect it to. All of the stimulus going into the economy will lead to some sort of recovery. It is the long run I am most concerned about.
I think it is irresponsible as hell for Mark Haines on CNBC to be calling this a Bull Market. He bases this on the fact that the market has rallied 20%. He feels that if a Bear Market is defined by a 20% decline, then a Bull Market should be defined as a rally of at least 20%. We are now up nearly 30% since the March lows, and this has been a big move. However, 30% of 683 on the S&P is a heck of a lot less than 20% of 1550! And the market came down over 50%!
Look at any major, multi-year Bear Market and you often have more than one rally of this magnitude during the declines. After the S&P peaked over 1500 in late 2000, there were two rallies of 20% or more, and another that carried about 18%, until the market finally found its bottom in 2003.
I like the double bottom formation in the Nasdaq, but when you look at a weekly chart, you see just how devastating this Bear Market has been. A lot of wealth destruction. Throw that in with the destruction in wealth caused by the residential real estate market, and possibly more losses in commercial real estate, and the destruction of wealth is the greatest since the 1930's.
When the market was bottoming in 2003, we had low interest rates, an already strong real estate market, and tax cuts were in place. The federal budget deficit was large, but nowhere near the size of it now, and energy prices were significantly lower. Inflation was in check...the price of Gold was in the $400 to $500 range and Copper prices were way under $1.00. Furthermore, there were no huge job losses like what we've seen in the last 18 months.
Now, we have a government that is intent on spending even more money that it does not have. This will result in higher taxes down the road, and possibly higher inflation. It looks like the 1970's all over again. After the Dow Jones peaked at about 1,000 in 1966, it took the market 16 years before it reached the 1,100 level. In between there were FOUR Bear Markets resulting in losses of 20% or more...about 50% during the 1973-74 decline.
After such huge losses in income and assets, the psychology of consumers has changed. We will begin saving again, because we realize we no longer can depend upon the returns from our investments to provide for our retirement. In fact, a recent poll I saw on the news today indicated that 61% of Americans will save more, rather than go back to their old spending habits once the economy improves. That is just a poll, but I believe this will be the new American mindset.
This current rally may continue upward for awhile. It is forecasting a recovery by the 3rd Quarter, but it is also just an oversold rally. This may be a significant Bear Market bottom, but don't expect to see Dow 15,000 within a year. Some traders have been making good money during this rally...but they had their heads handed to them during the declines. Soon enough, the next dip they buy will result in losses. That will be the end of the Haines Bull Market.