A question of timing
By Daniel M. Ryan
The S & P 500 [chart here] has been up the last six weeks out of six. Unlike the two bear market rallies earlier, this rally has been not only extensive but also lasting. The false-start rallies in October and November both lasted less than two weeks; each of them boosted the S & P 500 up about 150 points. This latest rally has pushed the S & P up about 200. On technical grounds alone, it looks like the bear market is over: all that's missing is a near-term bottom that's above March 9th's 676.53.
I myself was, to put it charitably, early. My trigger in was pulled as of October 20th of last year, before the November spill and the bear market within a bear market earlier this year. Although I admitted that I was off on the timing as of Feb. 23rd, I kept pointing to signs suggesting a bottoming process for the U.S. economy. Those signs are still there, and more recent market action is more consistent with these glimmers.
One of them can be found in the most recent Federal Reserve money supply data. M1 is no longer expanding at the same pell-mell rate. In fact, for the last three months, M1 shrunk by 8.2%. Although counterintuitive, a shrinking M1 in this period is good news given its frenetic growth earlier. The drop was mainly caused by a shrinking in demand deposits, from December's unusually high level of $464.7 billion. The shrinkage from that liquidity bubble, in tandem with recent indicators suggesting less economic weakness, indicates the end of a liquidity panic in the general public. Year-over-year, M1 is still up by 13.8 percent. A shrinking in this rate, to a large single-digit figure, would further show a post-panic state. It would also diminish fears of inflation down the road.
M2 is growing at a nice clip too: the 3-month growth rate of 9.4% is almost exactly where the 12-month growth rate is now. This rate does not portend the hyperinflation that some have been calling for. The monetary base is still growing at a fast clip, suggesting that the Fed is still adding reserves into the system. Total borrowings from the Federal Reserve have been down somewhat in the last six weeks, so new borrowings are not the cause of the reserve increase. It's been the Fed buying mortgage-backed securities. The effects of this purchase have already shown in mortgage rates, and there are some signs that the housing-price drop is abating. An FHA measure of housing prices gained 0.7% in February, confounding expectations of a 0.7% drop that month.
More recent data for March indicates that February's surprise rise may have been an unrepeated blip, and the most recent retail sales numbers have been disappointing, but U.S. overall consumer sentiment is now at its highest level since last September. Housing starts were down for March, but a plummet in apartment starts accounted for it. Single-family homes held up.
There have been three trouble sectors impeding recovery: housing, financials and the auto companies. As discussed above, housing has yet to recover but is showing signs of stabilization. First quarter earnings for financials have been marked by upwards surprises, and the stress test doesn't elicit the same fear it used to. As far as autos, Ford's 1Q results also had an upward surprise. The probably imminent bankruptcies of General Motors and Chrysler have had little effect on the S & P.
All of the above indicates that the 2007-09 bear market is now behind us. The S & P has been up more than 20%, and a 37 point fright spill last Monday was almost made up for during the rest of last week. First quarter earnings season is two weeks in, and the anticipated disasters were far fewer than feared. S & P action for this month could be described as an upward-drifting trading range. Its rallying on not-so-bad news is consistent with the first stage of a bull market, which corrects unjustified pessimism.
Once again, my timing may be off. It would be nice to conclude that the S & P will stay in an 840-70 range until economic recovery kicks it upwards. That happy scenario seems unlikely, though. 1Q earnings season ends this week, and a post-season hangover could push the S & P back down to about 800 or so. I believe that any such pullback, though, will be tailor made for the old maxim: "buy on dips."
Where Credit Is Due: Five weeks ago, I did veer into blaming the Obama Administration for the climax bottom of the bear. Admittedly, President Obama's remarks about stocks being a long-term buy came about a week before the March 9th bottom. As far as timing goes, there's a fellow who called it right on the day: Doug Kass. On March 9th's Kudlow and Co., he said that the market presented "the buying opportunity of a generation;" he stuck to his guns subsequently. Come 2010, Mr. Kass' call may very well be legendary.