The momentum is clearly with the bulls as we revisit the five figure market levels for the Dow Jones Industrial Average. When that level was hit for the first time in March of 1999 GDP was approximately $10 trillion and our national debt was approximately $7 trillion or 70% of GDP. Today we sit at roughly $14 trillion of GDP, up 40% since 1999, but nearly $13 trillion in national debt, up almost 100% and nearly 100% of GDP. The last time debt as a % of GDP had been at these levels was during the World War II funding period in the early through late 1940s and it looks like we’ll be crossing that 100% level soon. Adjusted for inflation, today’s 10,000 is really only about 7,600 compared to 1999’s 10,000.
However, you can’t argue with the strong recovery that the indices have posted since the March lows, with the Dow, Nasdaq and S&P 500 all up over 50% since then. The retail investor still hasn’t jumped onboard as Morningstar reports that of all fund inflows during the first nine months of this year only $15 billion has gone to stock funds with $255 billion going to bond funds. While the overall bond market is roughly twice the size of the stock market, risk aversion is the explanation for the 18 to 1 bond over stock investment by retail investors this year. As the Dow passes the headline 10,000 level and the market defies fundamentals in its climb of the wall of worry, the trend, crowd psychology and the $3 trillion sitting in money market funds all point to higher levels for the major indices over the near term. How high? Who knows? The better of the pundits, such as Blackstone’s Byron Wien for one, believe 1,200 on the S&P 500 (1,092 after today’s close) is achievable with 11,000 on the Dow in spitting distance. Dry powder coming off the sidelines, a better than expected Holiday retail season, and further cost-cutting and the resulting better than expected near term earnings can all be catalysts.
True to our name, we don’t like to get too specific, but rather from the fifty thousand foot view we can see a near term continuation of the rally that we’re in for all of the reasons listed above, even if we’re somewhat incredulous. But if we take a longer view of where we’re going and use history as a measure the view is decidedly less bullish. One can argue whether we are in a cyclical bull rally within a secular bear market or in the early part of a new bull market, only time will tell. Regardless though, a graphic comparison of the great bear markets of the past century with our current situation indicates the intermediate and longer term may be rough sledding for quite some time. The Business Insider brings us 15 Amazing Stock Market Charts courtesy of Doug Short at www.dshort.com. This chart shows how, from peak to trough and beyond, the great bear markets can take 10 to 20 years to work through. You hear pundits talk about that but can never see things being that bad for that long but a picture can convey the concept quite well:
What could lead to such a protracted market recovery? Well, where to start?
1. A slow economic recovery
2. Stubbornly high levels of unemployment
3. A continued credit contraction, especially wicked in the small business job and growth creating engine
4. Low levels of innovation spurred by low levels of equity and debt funding
5. High levels of debt and deficits at the federal, state and local level with large impending obligations
6. Intermediate to longer term inflation brought on by government spending and its co-dependent, money printing.
7. Longer term issues relative to the education and skill level of our workforce
That’s probably enough for now, but you get the picture. Pending decisions and legislation regarding real regulatory reform, federal spending and entitlement programs, and taxation, among other things, will help determine which path we, and derivatively, our markets, take. Early returns are not promising but hope remains. Even if we have another lost decade or two of flat market returns there will be sectors, assets, and regions of the world that will produce outsized returns for the wise and nimble. The point is, its probably fine to toast 10,000 and the recovery in your 401k balance with a single flute of champagne but don’t drain the bottle. You’ll need your wits for the ride ahead as there is much work to be done, vigilance to be maintained, and more storms to weather. Hold on, its going to be a rough one.
