Market Strategy Radar Screen Weekly - March 14, 2016

Not so much about the elephant in the living room

It’s the boat in the basement that is the issue

In the historical aggregate, we can’t help but think that the broad market’s performance since that low in March of 2009 is too often mislabeled a “great bull market” that has nearly tripled the level at which the S&P 500 traded from March 2009 rather than as what could more accurately be termed “a great bull market recovery.”

After all, while the S&P 500 at last Friday’s close of 2022.19 is 2.99 times the level at where the benchmark was on March 9, 2009, it is just under 30% from where it stood on October 9, 2007, the market’s pre-crisis cyclical peak.

That’s a 30% gain in a period of time that is just under 8.5 years.  Such performance hardly smacks to us of irrational exuberance or hubristic behavior, but rather suggests a market that has gone through a major crisis and then has had to laboriously overcome challenges in its path to climb a wall of worry back to and then slightly above where it once stood.

A cumulative 29.2% gain in price won over 8.5 years reveals an average annual gain of 3.44% or an annual compounded return of 3.056%, not exactly the stuff of froth and hubris.

We’d propose that perhaps we are not so much at the latter part or the end of a great bull market (as some are only too eager to suggest), but rather at a crossroads at which the recovered market seeks a catalyst to point it in the right direction.

Along with last week’s market anniversary date came commentaries from a number of market observers that referenced the longevity of the market run-up from 2009 as “the second longest bull market in history,” implying that the length of time that has passed would likely limit how much further the market could run higher.

In our collective experience spanning over three decades dealing with bull markets, bear markets, and recovery markets we have yet to find any one of them that comes with an expiry date time stamp.

Rather we have found more accurate Mark Twain’s admonition that “history may not repeat itself but it often rhymes.”

With consideration of that thought we recall that market direction and longevity of established market trends tend to reflect:

• perception of or actual direction of economic growth,
• monetary policy,
• corporate revenue and earnings growth (or lack thereof), as well as
• the relative valuations (and subsequently the relative attractiveness) of asset classes in comparison to one another;
• investor sentiment,
• seasonality.   

We cite these among other factors that are taken into consideration by the markets and their investor constituencies in pricing the value of asset classes.

For now we’ll look to revenues and earnings growth and the direction of interest rates as signposts pointing to the direction of where stocks are likely to head.

With the Federal Reserve’s policy now data-dependent, with the dollar beginning to lose some strength against a number of both developed and emerging market currencies, and with foreign central banks outside of the US accommodative and vigilant against deflation, to our mind the bull market recovery may have longer legs than skeptics imagine.

Central Banks “Pushing on a string?”

We don’t think so.  Through the events that unfolded in the period central to the great crisis and through the recovery process that ensued into the current economic expansion stateside, it was the efforts of the U.S. Federal Reserve via multiple rescue and recovery programs that were in our opinion (and in the opinion of many others) central in leading the stateside economy and markets to relative good health and where they are today.

The Fed’s key and most controversial efforts included:

• TARP and TALF, which developed into
• a  series of  QE (Quantitative Easing) programs which concluded with a  Tapering process in 2014

While there are those who believe that the Federal Reserve’s QE programs were not effective, we would argue that the Fed’s efforts were remarkably effective and successful considering the breadth and depth of the systemic damage that had been sustained by the economy and the markets and which had to be addressed in an unprecedented manner due to the nature and scope of the challenge that was faced.

We would suggest that evidence of the success of the Fed’s efforts in repairing the damage done by the crisis and addressing the dysfunction that led up to it include:

• A recovery process that resulted in over 14 million jobs being added since 2010;
• Headline unemployment that fell from a peak of 9.9% on March 31, 2010 to 4.9% in January of this year;
• The U-6 “underemployment” index (unemployed & part time and all persons marginally attached to the labor force index) that fell from a peak of 17.1% on October 31, 2009 to 9.7% in February of this year (2016);
• Vehicle sales at or around record levels (at an annualized run rate as high as 18 million units last November and currently still at levels in excess of 17 million annualized);
• A successful recovery process in housing evidenced by existing and new home sales;
• Recovery in construction activity;
• Healthy corporate balance sheets;
• Stateside banks in good stead, restored, and re-regulated (arguably over-regulated);
• A recovery in consumer confidence,

While challenges will never cease (that’s the way of the world since time began), the progress that has been made since 2009 in our opinion supports an economic expansion, that while not robust, appears sustainable as evidenced by economic data and prospects for further growth.

Markets Focus on the ECB

Last week developments in Europe tied to the ECB’s QE program garnered the attention of global investors with the latest announcement from ECB President Mario Draghi.

In the latest chapter of the process in Europe the ECB announced that it will ramp up its bond-buying program from 60 billion euros per month to €80 billion per month (beginning in April) as it enters its second year of QE.

While the recovery process that is taking place in Europe trails the progress made by the US economy in the last few years, it is important to consider the structural challenges to effect QE over a union of separate countries, as well as the newness of the process in the region. It was just last March that the ECB announced that it would undertake a QE process to counter deflation and move toward reflating the economies of the region.

Investors initially celebrated last week’s announcement of the expansion of the ECB’s QE program, then they reconsidered it negatively, but by Friday decided to celebrate the process, sending European markets closing broadly higher, with gains that ranged by last Friday’s close from as little as 1.33% to as much as 4.8% on the day.  

From our perch on the Market Radar Screen what’s key to the process is that action is being taken across the globe by central banks to restore economies to some degree of normalcy, even as developments in technology and globalization continue to raise challenges in the near term to prospects for economic reflation.

For now it is not about elephants in the living room (problems that are sizable but denied or unrecognized), but rather it is about the significant challenges that are well known but are being addressed and dealt with that matters.

We see it as analogous to dealing with a problem of a “boat in the basement” that needs to find a way to the water without shaking the foundations of the house.

No easy task, but one that is not insurmountable.

Stay tuned. 

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