The Massive Stock Market Rally of 2009 Ends Today:
In what the Wall Street Journal calls "a comeback of historic proportions," the U.S. stock market's banner year closes later on today. The paper says, "With one trading day remaining in 2009, the Dow is on track for its biggest annual gain since 2003, when it rose 25%. It finished Wednesday up 3.1 points, at 10548.51, a fresh peak for the year and the highest since October 2008." Leading its business section, New York Times also takes note of this year's rallying stock markets, which "will ring out one of their most volatile periods in history" in a few hours....
Earlier this year a friend of mine argued that we were going through a bear market rally. It seemed a very defensible position to me. But earlier this month I sent him a link to this chart:
The current trend is the dark blue. If this is a bear market rally, this is an unprecedented one. It would be the longest and most robust bear market rally on record. On the other hand, recent macroeconomic events have been somewhat unprecedented. I don't really see where this rally is based on the soundness of the economic fundamentals of the American economy. Before some might have argued that the efficient wisdom of the market was giving us a signal to which we should pay heed, but the American (and to some extent world) economy has been through two exuberant bubbles in the past 10 years. There's a flaw in the short term logic, so to speak. The market may point in the right direction in the long run, but in the short run we might still be screwed.
My friend is putting his money where his mouth is, so I tend to listen closely to his judgement as I know he is more than simply talk. I'm sure that readers also have opinions and are making decisions appropriately, so I'm curious the word out on the street is.
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Regardless of being a scientist, I see no real trends that are based on true quantitative data to hold onto. There are some bets which seem to be necessary for long term growth, which is the kind needed by the Obama estimates to keep the national debt from becoming dangerously high. We need to have renewed confidence in Goldman Sachs, and other very large financial firms. This is hard to do considering the events of the last few years. We also need to see the productivity and unemployment rate reverse directions. We cannot continue to be more productive indefinitely, which is very much part of what is boosting the markets. Of course I am an applied physicist working on new materials, not economics, which I feel lucky for. My data is much easier to interpret.
I'd note that if you include the price of gold, which is strongly correlated with the money suuply, we are pretty much still at the bottom. in 2000 when the market was at 10,000 ish gold was at 300 dollars an ounce. that's like a 40 to one ration or something. now gold is 1100 an ounce, the ratio has slipped to around 10 to one. so we are not exactly recovering to previous levels because the money being injected to get to the same levels is so much great.
also, we could very well be at the 10 or so month point relative to 1929 where you see it went up a ways then began a less spectacualr but still significant fall downward. the trend could still be down. we've done about a 50% fibonacci retracement :)
We just lived through 25+ years of irrational exuberance (the first crash was in 1987, the second about 1999). Between the two most recent crashes the experts were explaining that we were in the Great Moderation, and that there would never be another crash again.The efficient markets theory was part of that.
Google these books (all on Amazon):
Glassman: Tao 36000
Zuccaro: Dow 30,000
David Elias: Dow 40,000
Click this link:
Sharma (using astrology) Dow 30,000
Americans have a weakness for optimism, and Wall Street, the economics profession, both political parties, the Wall Street Journal, and dozens of free lance scum have been pimping it optimism specifically in Wall Street terms.
Glassman is still on the scene. People still respect him. He still gets TV time and newspaper ink. I don'tknow why; he should be a standing joke, like Monica Lewinsky and Lorena Bobbit, but he isn't.
I lived through the craziest times of the Sixties and was right in the middle of it. A lot of the financial world has been in the same cargo cult territory for decades now.
And yes,irrationally optimistic people often flip to apocalyptic pessimism. I imagine that a lot of the wiped out people are now waiting for Armageddon, with the seven-headed dragons, etc.
Hopefully the false prophets will be middle will be ridiculed to death, though I don't see that happening yet. Hopefully a reasonable middle will be found. One guy suggested that Japanese-style stagnation is the best we can hope for, but that conclusion will infuriate the cornucopians.