Climbing a Wall of Worry! Dec. 12, 2008
BEING STREET SMART
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Sy Harding
CLIMBING A WALL OF WORRY! Dec. 12, 2008.
The largest sectors of the economy continue to plunge into a seemingly bottomless hole; the housing industry (where it all started), the financial sector still locked in a credit crisis, the giant auto industry possibly within weeks of major bankruptcies, retailers struggling in their worst holiday season in decades.
Almost three million jobs have been lost since the recession began last December, more in the last six months than in the entire 2001-2002 recession. The loss of 533,000 jobs in November was the largest monthly decline since December 1974.
Investors have lost several $trillions in savings and investments in the worst bear market in stocks in 75 years. Income yields on bonds are at unbelievable lows.
Headline making scandals are showing up all over the place. The Governor of Illinois trying to sell his influence, even the former senate seat of President-elect Obama. Bernard Madoff, a former chairman of the Nasdaq Stock Market, and a respected Wall Street presence for almost 50 years, arrested and charged with fraud, in what the SEC is calling a $50 billion ‘Ponzi-scheme’ swindle of investors, “a stunning fraud that appears to be of epic proportions”.
Is it any wonder that the confidence of consumers and investors is also in a deep dark hole?
And it is. Over the last three months fearful investors have pulled a record amount of money out of mutual funds, brokerage accounts, and even hedge funds, in a panicked rush to get out of the stock market. Recent polls show a surprising percentage of investors and consumers now don’t even believe that money in government insured savings accounts or money market-funds is safe, and have been piling into short-term U.S. Treasury bills at a pace that has dropped the yield on T-Bills close to zero. They are willing to loan their money to the government for nothing rather than risk it anywhere else.
What is going on reminds me of a remark attributed to J.P. Morgan back in the early 1900’s that, “Bear markets return stocks to their rightful owners”. By that he meant that smart money or ‘rightful owners’ sell their stocks temporarily to public investors at high prices near market tops, but then buy them back at low prices when investors bail out at the lows of the subsequent bear markets.
What is going on reminded me of his arrogant remark because, while public investors have been bailing out at such a frenzied pace over the last couple of months, others have been quietly buying so heavily that not only did it offset all that selling, but was sufficient to produce a gain of 20.8% by the S&P 500 from its November low to its high last week.
The volatility has continued, but in the process the market has been in a bullish pattern of higher highs on the rallies and higher lows on the brief pullbacks.
And more importantly, it has been rallying in spite of the economic reports and worries becoming even more dismal and foreboding, including ugly employment numbers, plunging retail sales reports, threat of an auto industry bankruptcy, and soaring home foreclosure rates.
That is, for it three weeks anyway it has been climbing the proverbial ‘wall of worry’.
That is a good sign. As I have been saying for the last couple of months on my free daily blog, “The market always looks ahead and begins its next bull market while a recession is still underway and worsening, while public investors are at an extreme of pessimism. So obviously at some point it has to begin to rise in spite of continuing bad economic news. Since public investors aren’t buying, it has to be institutional and other ‘smart money’ that begins to buy in anticipation of improving economic conditions six to nine months ahead. And the market has to continue to climb a wall of worry for quite some time, until the economy itself begins to recover and public investors become less fearful.”
As regular readers of my column know, all year this year I have been predicting that the stock market would not bottom until the October/November time-frame, and that the bottom would be followed by a substantial bear market rally that would be well worth going after. Nothing so far had disabused me of that expectation. With the S&P 500 down 52% at its October low it would take a gain of 104% to get back to its peak of last October. It would take more than a 50% gain to retrace half of that decline in a bear market rally.
Stay tuned!
Sy Harding publishes the financial website http://www.streetsmartreport.com/ and a free daily Internet blog at http://www.syhardingblog.com/. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
Sy Harding
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