By William Patalon III
Money Morning/The Money Map Report
If history is our guide, then the rally we've seen in U.S. stocks in recent weeks is more than just a periodic run-up in share prices – it's the initial stage of a prolonged bull market.
The 13-week rally the Dow Jones Industrial Average has experienced off its March lows is the most powerful surge that index has seen since the Great Depression. If we look to history, stocks should continue to rally over the next three months.
"I say this with the utmost confidence and my fingers tightly crossed: This is the start of a new bull run," Hugh Johnson, chairman of Johnson Illington Advisors, told MarketWatch.com.
The 13-week stretch from March 9 through May 29, which saw the Dow soar 28.3%, has been bested only once – by the 40.8% run-up the Dow enjoyed in the 13 weeks that followed its hitting a bottom in May 1932. The Dow surged an additional 3.1% last week.
Going back to 1900 – in any given quarter (13 weeks) – there have been 18 cases in which the market surged 20% or more, Johnson said.
Looking at the trends, the odds are strong that the Dow will be higher three weeks from now, and that means the odds are strong that the index will be higher three months from now.
"Based on history, who knows where we're going to be four weeks from now? But in 12 weeks, the odds are we'll be 3.8% higher," Johnson said.
That can't be guaranteed, however, since there has been at least case where stocks had a huge quarter, only to plunge afterward: In May 1929, the Dow zoomed 26% in 13 weeks – only to plunge 38.9% in the 12 weeks that followed.
General Motors Corp. (OTC: GMGMQ) officially filed for Chapter 11 bankruptcy protection and another U.S. icon has been laid to rest (until the "new" GM emerges better than ever). With another $30 billion in government aid in hand, GM quickly moved forward by financing the acquisition of supplier Delphi Corp. (OTC: DPHIQ) by a buyout firm that will help it emerge from its own bankruptcy; reaching an agreement to sell Saturn to Penske Automotive Group Inc. (NYSE: PAG); and entering into a deal to unload Hummer to China's Sichuan Tengzhong Heavy Industrial Machinery Corp. (though regulatory "challenges" are sure to hold up that one). Meanwhile, Chrysler LLC progressed with its own restructuring Fiat SpA (OTC ADR: FIATY), much to the chagrin of about 800 dealers; and Ford Motor Co. (NYSE: F) plans to increase production to take advantage of the misfortunes of its primary competitors.
Shifting to a more "stable" industry, the Federal Deposit Insurance Corp. and FDIC Chairman Sheila Bair seem to be targeting Citigroup Inc. (NYSE: C) for a management shake-up, a move that could give regulators greater control of the one-time financial behemoth. Smith Barney brokers found their new homes as a significant joint venture between Citi and Morgan Stanley (NYSE: MS) was completed. Citi also attempted to save face from the prior American International Group Inc. (NYSE: AIG) embarrassment by announcing plans to withhold millions in previously promised severance packages to former execs. On the Troubled Asset Relief Program (TARP) front, JPMorgan Chase & Co. (NYSE: JPM), Morgan Stanley, and American Express Co. (NYSE: AXP) each revealed plans for stock offerings as they race to become the first major bank to repay "bailout" moneys. With GM now in bankruptcy and Citi struggling to overcome its own problems, the Dow Jones Industrial Average is replacing them with Cisco Systems Inc. (Nasdaq: CSCO) and The Travelers Cos. Inc. (NYSE: TRV) effective June 8.
Energy prices resumed their higher trek, as crude spiked above $70 a barrel for the first time since last October, despite reports that showed demand at its lowest level in 10 years. Goldman Sachs Group Inc. (NYSE: GS) analysts upwardly revised their projections for future global demand and warned of a "likely return to energy shortages" in 2010. As gas prices have skyrocketed about 50 cents above last month's levels, consumers are facing pressures at the pumps that threaten to hinder some of next year's anticipated growth in the economy.
Year Close (2008)
Qtr Close (03/31/09)
Dow Jones Industrial
10 yr Treasury (Yield)
It looks like fixed-income traders are not the only ones concerned about the expanding debt position in this country. U.S. Federal Reserve Chairman Ben S. Bernanke warned that the government "can't borrow indefinitely" and politicos need to take crucial steps to reduce a budget deficit that is rapidly approaching $2 trillion. Bernanke again confirmed his belief that the economy will move beyond recession by late 2009, though he also warned that the weak jobs market (among other conditions) will restrict future expansion.
Speaking of labor, the unemployment data highlighted the week's releases and the jobless rate surged to 9.4%, a new 25-year high, as 345,000 nonfarm jobs were lost from the economy. However, even bad news becomes good news these days as economists had predicted a far more substantial loss (525,000 jobs), and the May decline was the smallest since October 2008. Still, more than six million folks have seen their jobs disappear since the recession began in December 2007 and May represents the seventeenth consecutive month of labor contraction.
In other news, the manufacturing sector appears to be on the verge of recovery (though ever-so-slightly) as the ISM index reported its best showing since September 2008. On the housing front, construction spending jumped for the second straight month and pending home sales experienced its biggest increase in eight years. Personal income surprisingly rose in April, a positive sign for future consumer activity. Though retailers reported weaker-than-expected same-store sales for May, analysts were quick to point out that Wal-Mart Stores Inc. (NYSE: WMT) is no longer participating in these reports, a decision that should skew the numbers lower because the world's largest retailer accounts for about 10% of total retail sales. Luxury chains and department stores were among the worst performers last month, while The Gap Inc. (NYSE: GPS) benefited from a nice increase in activity at its Old Navy chain.
U.S. Treasury Secretary Timothy Geithner ventured over to China during the week where he praised it leaders for past stimulus measures (a tad different tact than used by his predecessor). Recently, China has complained about the ballooning U.S. debt and analysts remain worried about its continued participation in our Treasury auctions. The domestic powers-that-be have long criticized China about unfair trade practices and currency issues.
While the respective leaders have reservations about each other's policies, Geithner's remarks may be seen as smoothing over relations as our combined efforts will be imperative to securing an effective and long-lasting global recovery.
Weekly Economic Calendar
Personal Income/Spending (04/09)
Income increased; savings rate highest in 50 years
ISM – Manu – (05/09)
Stronger than expected showing
Construction Spending (04/09)
Surprising rise for 2nd straight month
Factory Orders (04/09)
Increase in orders, though lower than anticipated
ISM – Services (05/09)
8th straight monthly contraction
Initial Jobless Claims (05/30/09)
Total claims fell for first time in 2009
Unemployment Rate (05/09)
Climbed to 9.4%, a new 25-year high
Non-farm Payroll (05/09)
345k decline in jobs not as bad as expected
Consumer Credit (04/09)
2nd largest drop in borrowing on record
The Week Ahead
Balance of Trade (04/09)
Fed Beige Book
Retail Sales (05/09)
Initial Jobless Claims (06/06/09)
News and Related Story Links:
New Bull Run Called by Tracker of Dow's Historical Trends; Quarterly Climbs of 20% or More have Come Just 18 Times in More Than a Century.
Stocks end higher for week after mixed jobs data.
Sichuan Tengzhong Heavy Industrial Machinery Corp.
- Money Morning News:
Unemployment Rate Hits 25-Year High, But Losses Narrow.
- Money Morning News Analysis:
Geithner Opens Up Debt Dialogue With China, but the Dollar Still May be Doomed.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.