Is the bull back?!
Now that the stock market has hit the magic Dow Jones 10,000 mark, it sure feels like a hard fought climb up to that milestone. It’s still a ways away from 14,000 for the DJIA, which was once achieved in 2007, but as some of you may think — “we’re getting there.”
Image from the NY Times
Double Dip Recession: Why Dow 10,000 May Not Last
But here’s the thing: like many other market followers, I am quite nervous about this development in the equity market. Sure, we’re supposedly in an economic recovery right now, but many people are still feeling the pinch of lost jobs, no jobs or upside down mortgages, as far as I’ve noticed. As I’ve discussed before, we’re far from celebrating here in the SF Bay Area: the California unemployment rate is stuck above 12%, and as this interactive graph shows, it’s only gotten worse over time.
What’s more concerning to me is this thing that some economists are warning about: the risk of a double dip recession for our economy. For instance, I heard about how Carl Icahn (a billionaire investor) has been addressing the possibility of a double dip recession due to continued rising unemployment, which could very well impact the coming retail season as people put a cap on their spending. According to him, “we’re right on the precipice” of another economic contraction (quoted from this Bloomberg article). Here are some interesting points on this:
Yahoo Finance chart of the Dow Jones over the last 5 years.
The stock market going to 10,000 could simply be caused by investors realizing that we aren’t really going to the doghouse as badly as we initially thought. Good to know that so far, we’ve established the 6,000 level as “the bottom”. But really, is the Dow at 10,000 (or even 9,000) justified right now? I’m definitely in the camp that doesn’t think so.
As I review the fundamentals, I feel uncertain about this upward march in stock prices.
- We’re supposed to be recovering from the worst recession since the 1930s. Somehow, I expect it to take more work for us to pull out of the depths of this hole.
- In September of 2009, unemployment went up to 9.8% nationally, the highest levels since 1983.
- Can inflation be around the corner?
- What’s fueling the market’s rise? Improved earnings reports, apparently, but these are a result of business cut backs and company layoffs, rather than real growth.
So what do you think. How long will this mini-bubble last? Is anyone optimistic?
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{ 17 comments… read them below or add one }
My mantra is a jobless recovery is no recovery at all. After all, how can businesses get well with so many people out of work and not earning income?
I think the market’s recent rise this is a bear trap, plain and simple. I recently pulled out when the market hit 9700. I’ll buy again on the next dip. Yes, the market may go a bit higher, but the fundamentals just aren’t there to support it in the long run.
I also think inflation is inevitable – but the big question is how soon will it get here??? My fear is that when inflation does get here, the Fed will be pressured by the current administration to hold interest rates to a level that will not be high enough to effectively contain it.
Then we’ll all have even bigger problems to deal with…
My $0.02 (after taxes)
Len
@SVB – if you hear an echo, don’t worry. I agree with virtually everything that you have in this post. The rally on ‘earnings’ and the avoidance of a ‘total collapse’ don’t really tell me that stocks are cheap. All it says is that stocks are cheaper than before and they’re doing well relative to a really bad year. Then again, lots of things look good against a nasty background.
I’m not surprised to see Dow 10k, but let’s face it, there is no way that this is sustainable. Part of the problem with the double dip is the fact that so much money had to come from Fed and Treasury that even if the economy recovers strongly next year, we’ll spark inflation that will inevitably be cause for another recession…can I get another scoop of recession please…what…yeah…I’ll have some of those unemployment sprinkles too.
If you use p/e10 as a measure of value for the market, you’ll find that we’re nowhere near cheap and decidedly in the overvalued category at this level. This, coupled with the fact that even if we pull out of this recession, it won’t be a robust recovery. Besides, we still have to avert a commercial real estate meltdown.
As for unemployment, I don’t really worry about that since it’s trailing. It should stay around 10% for a few years. BTW, did you take a hard look at the last unemployment report? The percentage change in the media sounded so nice…of course, that’s because there were hundreds of thousands of workers that dropped of the statistics because they are now ‘discouraged workers’. I’m sure we’re well past 10% if we didn’t throw out this group…maybe even moving towards 15%.
Dow 10k…it’s nice, but definitely too early.
So here’s the question — if many of us virtually agree that the 10,000 level for this market is premature, then who’s fueling the market upward? People are jumping back in, but who are they — speculators? traders? momo investors? Or are there actual average joes getting suckered into a potential bear trap, as Len put it? The pain of late 2008 is still quite fresh in my mind (and yeah, just half a year ago we were writing off our retirement funds….). Too crazy too soon, I agree.
My position in the markets: one foot in, one foot out.
if many of us virtually agree that the 10,000 level for this market is premature, then who’s fueling the market upward?
I’ll stick my next out and admit I’ve been buying all year, though I wish I’d been selling a bit more *last* year to pay for it.
March was a super bargain but most people were so battle-scarred that they couldn’t see the lows for the blood in their eyes. I wouldn’t say it was a no-brainer by any means, or a ‘dead cert’ that the market would rise, but the cheaper it gets the more the odds are stacked in your favour.
I think the move up is pretty rationale – sort of. What do I mean?
Well, if you look at economic indicators, from China’s use of raw materials to inventories as companies start rebuilding stock, there’s plenty of reason to be optimistic that earnings are going to increase.
Has this happened to a significant degree yet to justify these prices today? No, probably not. (Hence high valuations). But if it’s coming, and the more risk-hungry investors want to get on-board, they’ve been happy to buy today rather than wait for others to buy first and pay a higher price later.
Better to be early in selling a market and early in buying back in then late on both in my view!
Things do look heady now and we’re clearly not going to see another 50% rise in the next year. We will almost certainly see some small pullbacks. I don’t expect the return to March lows many seem to be waiting for but anything is possible if there’s a major ‘event’.
The trouble is ‘events’ are always possible and a worry, but mostly we only think about them after one has happened. CNBC was barely talking about a meltdown in 2007 or 1998 for that matter. Bear markets come out of the blue, not when everyone fears them, imho.
Don’t worry about unemployment — companies only begin rehiring as the last resort as they’re just as nervous as investors about the recovery.
Bit of a ramble. Thanks for the link!
If many of us virtually agree that the 10,000 level for this market is premature, then who’s fueling the market upward?
My view is that it is fruitless to look for rational explanations of most stock market behavior. There is some rational behavior, of course, but the rational side of stock investing is so simple to figure out that it can be described in about 50 words. The productivity of the U.S. economy has for many years been strong enough to support annual gains of 6.5 percent real. Anything above that or below that is the product of emotion. An annual return of 6.5 real translates into a P/E10 level of 14 (fair value). Anything above that or below that is the product of emotion.
We were at insanely high price levels from 1996 through 2008. We toyed with the idea of going rational early this year, when we dropped to 14 (we actually went to as low as 12 for a brief time). But it scared us to let in that much truth all at once. Did you ever try to space out bad news because you could not bear to hear it all at once? You’re picking up clues that the boss you love is going to be replaced by one you know you will hate but you don’t start looking for a new job because you just cannot face something like this at the moment? That’s where we are today. We know we need to take a bigger hit than we yet have the courage to take but we prefer putting it off for a bit.
Spacing out the hit makes a certain amount of sense. But it’s irresponsible for us to push prices back to dangerous levels. Doing that greatly increases the possibility that, when we go down again, we won’t stop at 14 but will go all the way down to 8 or lower. The bigger the fall we have to take to get back to fair value, the more emotional momentum there will be on the down side. Say that the person worried about his boss being replaced decided that the way to deal with the emotional pain was to go on an expensive vacation to get his mind off his troubles. That makes it harder to deal with the job instability down the road but it provides a little temporary relief. That’s the way we are playing it today.
What most of us lack is a standard for knowing when prices are too high. People guess all the time. But the guesses are emotion-based because we don’t use a standard that applies in all markets to make the guesses. I think that the right standard is the fair-value P/E10 of 14. That permits gains of 6.5 percent real. Anything more than that is trouble and anything less than that is trouble. We all should be working to keep stock prices to what is justified by the economic realities, in my view.
Rob
You are right about all of that, and October, late in the month, is always bad for the market!
Well let’s look at the bright side. If things are going to dip later this month, the fact that this runup occurred is a good thing. It all just balances out and the dip will just take us to where we were to start with a few weeks ago… so no skin off your equity accounts, would you say?
SVB – We’re in the same area. Do you not feel the traffic, busy restaurants, and massive spending down in Santana Row?
I’m telling ya, it is absolutely a raging recovery we have here in San Francisco! Even the property markets are coming a live with multiple bids the norm again.
I’ve come away with 10 takeaways from this recession which I wrote about today. I also gave a shout out to you as well.
Best
Until jobs come back, I won’t believe the recession is over.
Robert – the funny thing is, everybody says only when jobs come back, but then everybody is US! Is anybody not employed on this board I wonder?
I’m telling you guys, look at the data. Unemployment is a lagging indicator.
I agree it’s the most important thing morality wise — I’m all for wanting people to have jobs. But judging the recession by it is wrong. I doubt any recession has ended with rising unemployment. It always comes after, when the economy starts to grow, people can’t be pushed any harder, efficiencies have run their course, and new staff are required.
Hi, and thanks for the link!
I think I agree – especially with this comment:
We’re supposed to be recovering from the worst recession since the 1930s. Somehow, I expect it to take more work for us to pull out of the depths of this hole.
The thing is that when we were in the depths of the recession, we kept hearing officials urge us to get out there and start spending with confidence. They said (and they say, every time there is a dip in the economy) that the worse thing you can do in a down economy is to get stingy. I don’t know how I feel about all that – I think the uptick in the stock market IS a sign that people are getting over their shell shock and are starting to buy. But I don’t think that that was the problem with the economy. We didn’t have the subprime fallout, the biggest bank bailouts in US history, the Big Three auto makers take a beating, etc., etc. because we didn’t have CONFIDENCE. There are systemic failings and, as far as I can see, there has been little reform to take care of it.
I met a man the other night who was working with the FDIC as it took over a local bank. The bureaucracy is so terrible that the Fed guys can’t even get the money to pay the utilities. And, according to the consultant (who used to work for the bank), 80% of the people working on the gov’t bank takeover weren’t even from the FDIC – they were consultants. In particular, former executives at failed banks.
I’m no expert, but I feel as if there hasn’t been enough change yet for things to be all better….
But then again I’m particularly cynical ever since hearing about Barbara Ehrenreich’s book (author of Nickled and Dimed) Bright-Sided: How the Relentless Promotion of Positive Thinking Has Undermined America
see:
http://www.boston.com/bostonglobe/ideas/articles/2009/10/11/enough_with_the_bright_side/
And I’m currently reading Naomi Klein’s Shock Doctrine, the thesis of which basically says that economists and corporations use “shocks” (like 9/11 and the recent economic fallout) as opportunities to prescribe more privatization and more Chicago School style economics when voters and populations are dazed and desperate. I’m worried that things are going to get worse in Wall St. rather than better. Not to mention that now there’s a whole new racket for refinancing mortgages which nets a broker a fee, but leaves the borrower with another loan they can’t pay.
This was long winded and rambly, sorry, all I meant to say was “Thanks for the link” and great post.
Could be the run-up is simply in anticipation of the dollar totally collapsing (e.g. big inflation). Say if the market goes up 33% but the dollar drops 50%, did it really gain anything? Or suppose we plot the market in gold instead of dollars.
This is definitely a worry for me… Here comes that ‘W’ in the graph. Looks like Gold is really worth a look again and do I dare say a price point of $2000 in the not so distant future?
Mike
The Dow Jones Index getting this far is just short of a miracle. No major job increases from the business sectors and no great increase from revenues from many companies. There are not many banks that can give out loans like there was in 2003. The reason behind the rise in the stock market is because investors are trying to buy low. Well, I believe we are at the high point of the overall market and do expect a 10% decline.
Now, my only guess is that will the major markets post a gain by the end of the year. 2007 and 2008 ending in negative years but 2009 now has a chance to finish above 0%.
I still cannot see how we get great growth in the economy and the stock market with the consumer (70% of the economy) tapped out. Where is the growth coming from without the consumer? Can foreign earnings by US corporations make up for US consumer weakness? Then there is the question of energy prices. I keep hearing conflicting reports. One minute the pundits are telling us oil prices are headed down because of a huge supply overhang sitting around on tankers unsold. The next minute you get authors like Jeff Rubin saying we will be back to three digit oil prices in the first quarter next year. See Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization by Jeff Rubin. If that happens all bets are off. What do people think?
I’d like to add to these comments that here in the U.K. there is a massive problem with debt — personal debt, bank debt and government debt. If the U.S. is similar then the global economy is in deep trouble with just this factor, never mind unemployment (which reduces available taxes for Government) and the threat of inflation (which, in the U.K. could come from the Bank of England printing money). This has got to push markets down. Just my thoughts on the subject!