Not quite four years ago — on March 9, 2009 — the stock market bottomed out. The Dow Jones Industrial average hit 6507.04, the S&P 500 hit 676.53, and the NASDAQ hit 1268.64. At that point, all three indices had fallen by more than 50% since their pre-bear peaks in October 2007.
And yet, here we are. The Dow has just set an all-time high (though some have rightly pointed out that this ignores the effects of inflation) and the S&P 500 is knocking on the door.
The NASDAQ, of course, is still well off its all-time, dot com high. Believe it or not, it closed March 10, 2000 at 5048.62 — a full 56% higher than where things stand today.
But still, things are looking up. Which begs the question… How long can it last?
Well, the latest issue of Money Magazine had a three page spread highlighting the reasons that the bull may keep running. This, in itself, may be a sign that things have run their course. While we still haven’t (imho) reached euphoria, the masses are starting to buy into the idea that the market’s recovery is real.
Money’s arguments in favor of a continued bull market focused on a number of factors, including:
- Stock market valuations. At the time the article was written (late January) the average P/E ratio was around 15 compared to a historical average of 16. The end of the late 80s and the 2002-2007 bull markets topped out around 17, whereas the P/E reach 29 at the end of the 1990s bull market. Note that, after the recent runup, we’re currently at an average P/E of 17…
- Factory productivity. Industrial production has been growing since the end of the recession in 2009, but we still haven’t reached pre-crisis levels. Thus, companies can continue to ramp up without making major investments.
- Consumer credit. A byproduct of the recession and the attendant low rates has been that consumer debt obligations are the lowest they’ve been since the early 1990s.
- Interest rate considerations. The Fed has gone on record as stating that they’ll keep interest rates low at least until unemployment falls below 6.5% (assuming inflation remains tame).
- Rallies are still broad. As a bull market matures and nears its end, gains are increasingly driven by fewer and fewer stocks. Notably, yesterday’s climb to record levels saw all but three companies in the Dow post gains.
Of course, whether the bull will continue to run is anybody’s guess. Perhaps we’ll continue on to even greater heights. Or maybe, as many technical analysts fear, we’ve reached a dreaded triple top and the bottom is about to drop out.
Either way, we’re sticking to our plan.
This is not sustainable, and I expect a major correction soon. The market is inflated by Bernanke’s quantitative easing policy, not by any realistic expectations of future corporate earnings. There is a fairly reliable predictor called the Greedometer (google it), and it is pointing toward cash out now!
I’m not a paid professional, so probably worth same as all the other “free advice” but here you go:
The Fed will try to get it to last as long as possible, probably keeping Treasuries as unattractive much longer than when GDP returns. Not so much as a conspiracy theory as a “rational actor theory,” to the question of why an Obama administration acting so contrary to 2008 campaign rhetoric? Here is one example of a story about pensions having “7.5 percent assumed rate of return,” that phrase ‘assumed rate of return’ has popped up in articles about states underfunded pension plans and how there was sold to voters decades ago plans that did not need extra funding based on these assumed rates of return. From contention in either WI or RI to recent articles on FCN about USPS or IL, pensions obligations keep being mentioned. Also gives a non-cynical answer to why a “get tough on Wall Street” administration actually been quite friendly to Wall Street, as in domino falling of states is the greater evil.
I’m not too sure how much the retail investor is going to play apart in the bull market. Last summer were articles that despite the Fed’s actions, retail loved treasuries, also the bull market gains are on the back of a trillion leaving the market. I really am not expecting a “great rotation” back to stocks by retail investors, especially when learning folks are using stock mutual funds to bond funds, not money market funds, in their wishful thinking — if the rotation out of stocks to bonds was by nearing retirement Baby Boomers via their employers’ retirement program; a group that’s been burned twice in a decade and maybe not convenient to switch. I have brokerage accounts I know how to buy or sell whatever and will have quick conformation, I actually have no clue how to do the same with my employer’s program, so a phone call, I know there will be paper forms to file and confirmation would probably be my quarterly statement. So guessing if the “great rotation” out of stocks is like the latter, unlike many taking heads on Daily Ticker, I’d expect it to stay out of the market.
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Long/Short – I’m guessing the bull market will continue in some form or another, because of manipulation by the Fed, in order to advert another type of crisis. Yet mostly by institutional players and corporate stock buy backs, than by the retail investors. I am altering my plans slightly, to permit a drift toward stocks while bonds have become so expensive, but keeping a eye on prices to rebalance my portfolio when prices return to more historical levels.
What is your plan?
The so-called bull market will end when the Wall Street marketing machine has succeeded in cajoling, embarrassing, intimidating, and arm-twisting everyone crushed by two stock price meltdowns since 2000 back into stocks.