The Bull Market "Gets No Respect"
By Steve Leuthold | Posted: 09-22-09 | 11:43 AM
I am very optimistic about prospects for the U.S. stock market for the remainder of 2009 and perhaps the first half of 2010. The underlying market trend is now keyed to investor perceptions of 2010. Third quarter U.S. real GDP growth will be at least 2% and perhaps 3%, and the NBER will ultimately declare the U.S. recession ended in August 2009 (a month or two earlier than I projected at the start of the year). This bull market is getting, like Rodney Dangerfield, “no respect.” Expect the underinvested to capitulate by the end of the year. I now see a major risk of monetary debasement inflation. I don’t see this as an immediate risk, but if the government does not move decisively towards fiscal responsibility its likelihood will increase. There are reasons for optimism though, as the U.S. economic system and credit markets continue their recovery from the 2008-2009 crisis conditions.
After Labor Day... Now What?
Some numbers crunchers tell us September is the worst performance month of the year. The media fonts of knowledge and their bearish-leaning guests have been citing this historical “fact” as a reason for stock market caution. I just heard a CNBC commentator state “Everyone knows September is a terrible month.” Should you pay attention?
Since 1900, September market performance has averaged a mere +0.2%; the worst month is October, down 0.39% (average month +0.48%). Since 1982, the S&P 500 shows both September and October have experienced miniscule average declines, –0.18% for September and –0.61% for October. By these measures October, not September, is the worst market month.
Anyway, as far as September is concerned: Up or down, it’s a coin flip. Sure, there may be some good reasons for September market caution, but the past history of September market performance is hardly one of them. In reality, I see all of this talk of a miniscule negative September performance bias as much ado about almost nothing.
However, for professional investors, September is a pivotal month. It is my observation that after Labor Day fundamental investment focus strongly shifts to the next year in terms of earnings and the economic outlook. With 2009 now mostly baked in the cake, the fundamental outlook for 2010 becomes the critical investment factor, except among short term traders and some technicians.
Sure, shorter term market moves during the final four months of 2009 will still react to news events, political, economic and company surprises. But the underlying market trend is now keyed to investor perceptions of economic conditions in 2010. The market looks ahead and in this respect the new year starts after Labor Day when the big investors here and abroad return from holiday.
The Tide Be With You
It is obvious the global economy is rebounding. Globally, in alphabet terms, it’s a strong “V” bottom, except for the U.S. economy where the rebound is less dynamic. At last count, ten countries show positive real GDP growth for the second quarter of 2009. And it is not just the emerging countries - Germany reported GDP growth of 0.8% in Q2. However, here in the U.S. Q2 GDP was still lagging, down 1% (revised upward from –1.5%) for the second quarter.
In the current quarter (Q3) I think it is close to a certainty that the U.S. will be participating in the global expansion thanks to the stimulus of “Cash for Clunkers,” rising home sales (new and existing), improving retail numbers, less negative employment trends, and rock bottom interest rates.
How long will today’s still cautious and bearish investors be able to stand against the increasingly obvious rising global economic tide? Some now claim the improving economic news is already discounted in the current rising U.S. stock market. I don’t think so. There is lots more good news ahead. Reported earnings in the U.S. beat expectations in Q2, perhaps the result of cost cutting, but now earnings estimates for Q3 are significantly being revised upward. Cost cutting is still a factor, but now so is revenue growth. In addition, an estimated 40% or more of the earnings for S&P 500 companies are derived from foreign operations and obviously reflecting the stronger global economic rebound.
The U.S. market has performed surprisingly well in August. The global economy is strong and the U.S. economy now clearly improving, trends that are likely to continue well into 2010. Cash returns remain almost nil and longer bonds will probably be losers as rates edge up. Equity valuation benchmarks in the U.S., while no longer in undervalued territory, are well below overvalued territory. By the end of the third quarter 2009, being underinvested will become a business risk with some clients. Technical and momentum market measures remain strong and the Leuthold Major Trend Index continues to be very bullish.
The "Lehman Collapse Vacuum"
In 2008, after the Lehman collapse, the S&P 500 fell from 1250 to 900 in a mere four weeks. The S&P 500 has now moved into what Ian McAvity refers to as “The Lehman Collapse Vacuum.”
Thus today Leuthold, The Bullish Technician, sees no overhead resistance of significance before S&P 1200-1250….. My initial upside target zone over the next six months (possibly even by year end 2009). This assumes the still cautious do capitulate and the dollar is not decimated prior to Q2 2010.