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The U.S. stock market has staged one of its most powerful rallies in history, zooming nearly 70% in the 12 months that followed the March 9, 2009 market low. U.S. stocks soared another 5% during the first three months of 2010 – its best first quarter in a dozen years. But where do we go from here?
Between the New York Stock Exchange continuously reaching new highs, the Dow Jones Industrial Average rising up along its eight-day average, and a rebounding retail sector, there's reason to celebrate what appears to be a market recovery offering investors profit opportunities.
"You can't bury your head in the sand and ignore what's happening," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "If you did that, you've missed a 60%-plus rally in the [Standard & Poor's 500 Index] since early last March. You cannot fail to acknowledge what's happening" in the markets, even though top traders understand that cheap money from the government bailout – and not a well-rounded economic recovery – is most likely behind the torrid run-up in U.S. share prices.
Money Morning Question of the Week: Is this a true bull market? A year from now, are U.S. stocks – as measured by the Standard & Poor's 500 Index – trading higher, lower, or at the same level as they are today?
What follows are some of the most well thought-out responses we received (as well as a previous comment regarding the bull vs. bear market argument posted on our Web site) with many agreeing this bull market is too good to be true.
My guess is that the stock market a year from now will be a lot lower [than it is now]. I suspect that when we are able to look back on the recent "bull market" in a larger or longer context, it will show up as a large bear market bounce, fueled by a huge government stimulus and ultra-low interest rates that make keeping cash in U.S. Treasuries or money-market funds very unpalatable.
The market crash that ended [at least for the moment] a year ago was triggered by excessive debt, financial manipulation, deceit, and a lack of true moral hazard. We now have even more debt, unabated financial manipulation, collaborative deceit between the Fed and Wall Street, and confidence bordering on certainty that if the too-big-to-fail (TBTF) guys fail again, the government will not dare to not bail them out again, so pile those bonuses deeper!
Given that the "recession" didn't clean up the problems that caused it (as a consequence of unprecedented government intervention), I don't see any way that we can avoid another drop, deeper and harder, to correct the problems that were not allowed to correct on the previous iteration. I do not know when the next collapse will begin, or what will trigger it, but with the PIIGS, underwater mortgages, $3 trillion-plus of U.S. short-term debt to roll over to reluctant creditors, a possible trade war with China, and a host of other threats, it is a target-rich environment.
What I can say is that if another collapse happens between now and elections this November, and the too-big-to-fail banks come back to Congress demanding another bailout, they will get a lesson in moral hazard. If our Congress-critters voted to bail them out again in the months or weeks leading up to the election, most of them wouldn't even dare to return to their districts to campaign for re-election. And if [U.S. Treasury Secretary Timothy] Geithner or others in the administration tried to bail out the banks without Congressional authorization, I would expect to see immediate impeachment hearings and legislation blocking such a bailout. Americans have NOT forgotten the previous bailouts, not to mention the gargantuan bonuses that the bankers then paid themselves on the heels of that bailout.
I do not know (I don't believe anyone does) where the Dow [Jones Industrial Average] might end up in the midst of such events, but assuming we still had an economy, despite the threats of the TBTF banks, then I would not be surprised to see it touch lows of 2,500 or so. Such a collapse would cause tremendous collateral damage on Main Street, as well as Wall Street, but if it really liquidated the corruption that brought this about in the first place, it would be worth it. Such a liquidation is necessary to develop a foundation on which real growth and prosperity can develop.
On a Short Bull Ride
This isn't a 'true bull market.'
Markets overreact, so they wobble, going to an undervaluation in response to an overvaluation (or vice versa), then down too far, up again, and on and on. A couple of years ago, suddenly house prices were seen to have risen far too high. The banks and the loan famine affected the market, pushing it absurdly low and powering one whopper of an oscillation that will continue for ages. We're on an upward leg of this, that's all.
So where will the Standard & Poor's 500 Index be in Spring 2011? [It will be] in the present area. It will go on rising awhile, crest in the autumn, then sink for a year or so.
But be warned! Soothsayers can be accurate or be believed, but not both.
An Over-Medicated Market
We are not in a true bull market. To tell the truth, [it's] an almost European-style, doctored, and propped-up market, with a backdrop of astronomically overextended deficits and debt.
[It's] lightly ignored, with correction deferred in favor of government popularity.
[It's] like someone who eats the wrong diet, has all the symptoms, but gets medicated and keeps going – until one day…
Too Soon To Tell
As the old adage tells us: "Past results are no guarantee of future results."
The future market direction cannot be determined by past downturns. A whole new set of factors or parameters is in play now that did not exist in prior downturns. Future events on a daily basis are not known now that could cause a further down market correction or a turn around to an upturn market.
One thing to consider in favor of the stock market going up is that every pay period, retirement money is taken out to be invested by money managers. Since interest rates are so low, the only place money managers can get any decent returns is to invest money in top-quality dividend or growth stocks, after which they hope for a further turnaround in the economy.
Since I am 68 and retired, I have only about 15% of my retirement money invested in good, dividend-paying stocks, [since I'm] waiting for a more-definitive direction in the economy.
Congress: Solving a Problem With More Problems
MM: We were surprised and pleased with the number of responses we received to our previous Question of the Week about U.S. debt. Here are a couple of additional responses.
As [former U.S. Vice President Dick] Cheney famously said, "deficits don't matter." That is perfectly true – up until now. Since most developed economies are now running deficits, who will finance them? Increasingly, it looks like the debt will have to be monetized – which in due course can only lead to inflation.
Whether I favor budget cuts or tax increases is wholly irrelevant. Congress will not quit its spending spree until forced to – either because of a run on the dollar or because of excessive inflation. Maybe it won't happen this year, maybe even not next year, but the day of reckoning can't be postponed indefinitely. It is simply counterintuitive to figure that the answer to a crisis caused by excessive debt is even more debt.
The Numbers Don't Lie
I am always surprised that no one looks at the real debt owed by each family. The unfunded liabilities of social security, prescription drugs and Medicare represent debt that is owed by each one of us. I suppose it is because the numbers become so huge.
To put it into perspective, an unfunded liability is like a negative amortization loan on our house that continues to grow. Looking at the national debt and not at all the other liabilities is like looking only at the growing balance on our credit-card debt (national debt). This is the credit card debt that we use to make payments on the house loan (unfunded liabilities) that continues to grow. We are losing ground on both! From an accounting point of view, current liabilities (national debt) and long-term liabilities (unfunded liabilities) are both liabilities. Both lenders want to get paid.
Let's say we decided to stop, turn around and pay off the debt and fund all liabilities. If we put it on a 30-year mortgage at 6%, we would owe $8,974 a month. That is nearly twice what the average family makes! We cannot tax our way out; there are just not enough rich people.
As for the politics of the situation, we are all to blame! Every president, every Congress person, and every citizen is guilty of this absurdity – at least for the last 50 years! So, does stupidity by previous leaders justify stupidity by the current leaders? That seems to be the only argument for justifying the absurdity moving forward. The funny thing is we all agree this is absurd stupidity, and yet we let it continue.
We need to stop the stupidity and do it soon if we hope to avoid bankruptcy. I am not sure we can avoid it. By any definition, we are already technically bankrupt.
The only good news is that we can legislatively cut our unfunded liability by cutting the benefits on social security, Medicare and prescription drugs. All of us that paid all those taxes for a promise of future benefits are not going to get paid. It is a mathematical certainty. The only question is when are we all going to admit it out loud.
My guess is our leaders will wait until we are in crisis before doing anything. Their logic seems to be: "Why make painful decisions now when you can let your successor deal with your mess?" What are we going to do when the cost of borrowing doubles or triples because no one wants our worthless debt? What happens when the lenders stop lending because they realize they are not going to be paid? Only time will tell, but the "debt bomb" ticks on.
[Editor's Note: Thanks to all who responded to our third installment of the Question of the Week feature regarding the bull market. Be sure to answer next week's question: How confident are you in the U.S. jobs market? Do you feel that the U.S. employment outlook is getting better, getting worse, or essentially just holding its own? Are you in the job you want to be working in? If not, why not? Send your answers to firstname.lastname@example.org.
Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at email@example.com. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.
Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
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