Those of you who have been reading my analysis are probably wondering when I am going to throw in the towel and just admit that the bear market is over and start talking about buying stocks again. Well, I hate to disappoint you. It is not going to happen yet. Let’s take a much bigger picture look at what is occurring. First, we are in a financial crisis produced by the bear market and those don’t just go away without a strong fight.
Second, how could a 40% plus rise in stocks not mean the bear market is over? Well, let’s take a look at history for that answer. In 1929, a bear market started as a result of a credit/debt crisis. There are many similarities between that period and today. The big difference is the type of debt crisis. The bear market eventually bottomed in 1932 after an 86% decline. The first “crisis” decline in 1929 saw the market drop -44%. Following that -44% decline, the stock market went up 46% over the next 147 days. If you compare that to today, we are going through a similar experience. The crisis of last year resulted in a -48% decline. Thus far we are a little over a 40% increase in the stock market over 137 days. This is not in any way unprecedented. The problem for stock market investors in 1929 was what followed the 46% increase. Following that incredible stock market rally was an -82% loss over the next 3 years.
Third, the market has been rising over the past two weeks as a result of earnings season reports. Over 70% of the companies of the S&P 500 have reported better than expected profits. However, a closer look would reveal that the vast majority of these “profits” were due to cost cutting and not real growth. These are clearly not sustainable.
Fourth, Wall Street is beating the drum that the recession is just about over. The index of leading indicators came out last week “and is rising at a rate that has accurately indicated the end of every other recession since the index began being compiled in 1959” (Dallas Morning News). Is that really valid when we are dealing with the worst recession since 1929 when no leading indicator index was even around? It is important to compare apples to apples. Wall Street has a history of claiming the recession over prematurely many times before.
Finally, unemployment is a major crisis and there is nothing in the works to fix it. Of course, you can always get a job working an Obama induced construction job.
Let’s not get to ahead of ourselves. I was premature to write that the stock market rally was nearing the end. Obviously it still has more to go. I don’t think that I am wrong to suggest the bear market is over.
Prudent Money Market Outlook 