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Entrepreneur58 (37.68)

Pillars Of The Stock Market Now Down To One

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June 18, 2009 – Comments (11) | RELATED TICKERS: UNG , COW , DBS

If you look at the US stock bull market which began in 1982 and ended in 2007, you can see that this historic, multi-decade bull market rested on a number of important pillars of strength.

#1 - Falling interest rates.   Falling rates support economic activity and asset prices.

#2 - Falling tax rates.  Falling tax rates support economic growth and asset prices and who doesn't love a tax cut?

#3 - Increasing government spending.  Government spending supports economic growth and asset prices.  This is particularly true if the government is borrowing the money rather than raising taxes.

#4 - Improved credit availability.  The easier it is to borrow money, the more money people will borrow and spend, which supports economic growth and asset prices.  Just look at what subprime lending. teaser rates, and liar loans did for the housing market during the boom years.

#5 - Increasing immigration.  Immigrants often work harder and cheaper than natives which keeps costs down and improves productivity,profits, and asset prices.

#6 - Increasing imports of goods and outsourcing of services.  Cheap imports and outsourcing keep prices low and inflation under control.  This is bad for profits of manufacturing industries, but good for finance, insurance, and real estate based businesses.  It also helps "emerging" nations grow.

Now, as I see it, these six pillars of strength were the main factors driving the massive stock bull market in the US.  As of today, all but one of these pillars has reversed course.  The only thing holding up the US stock market and economy now seems to be the single pillar of increasing government spending.   I would submit that a stock market and economy which is based on vast quantities of government spending is probably not very sound.  Of course, all of our problems today could have been avoided had we not built our economy around borrowing and spending as much money as we could collectively get our hands on.  The paradox of economics is that what helps you in the short run can often hurt you in the long run.  If you have access to credit you can always increase your living standards today by borrowing money, but when your credit line runs out, you have no choice but a rapidly falling standard of living.  There are two ways your standard of living can fall - either by prices rising more rapidly than income (inflation) or by income falling more rapidly than prices (deflation).  These are the only options for the future and I doubt that either of them will result in higher inflation adjusted stock prices.  Commodities still look like a superior investment as they will go up faster than wages if we have inflation and they will go down slower than wages if we have deflation.  Either way, the amount of labor it takes to buy commodities will go up, so the amount of labor you can buy with your commodities should also go up.

11 Comments – Post Your Own

#1) On June 18, 2009 at 1:21 PM, FreundInvesting (28.87) wrote:

#4 is particularly important, and more than $2 trillion - per Merideth Whitney, as of last November - of credit has been withdrawn from the system. Probably much more than that by now.

good article, +1 rec

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#2) On June 18, 2009 at 1:37 PM, kaskoosek (29.98) wrote:

#3 - Increasing government spending.  Government spending supports economic growth and asset prices.  This is particularly true if the government is borrowing the money rather than raising taxes.

 

?????

 

Debt is even worse than taxes.

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#3) On June 18, 2009 at 1:42 PM, portefeuille (98.79) wrote:

If you look at the US stock bull market which began in 1982 and ended in 2007, ...

In real terms it ended in spring of 2000.

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#4) On June 18, 2009 at 1:43 PM, portefeuille (98.79) wrote:

so this is the tenth year of the bear market ...

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#5) On June 18, 2009 at 1:43 PM, millionby24 (< 20) wrote:

statistics are smoke n mirrors in the 2009 economy :)

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#6) On June 18, 2009 at 2:15 PM, checklist34 (99.11) wrote:

10th year of a bear market is exactly right.  we're at least most of the way through what history will remember as a long secular bear market that began with the popping of the nasdaq bubble. 

this will go down in history as the 2nd most savage bear market in US history, behind the great depression, and quite probably the longest secular bear market since the depression also.  in the 70's era secular bear that maybe started in the late 60s and maybe ended in the early 80s, maybe ended in the 70s, i don't know how to define it.

But the epic end of the world dump in late 74 was the peak of that secular bear, and i'd wager heavily that march 2009 will be remembered as the peak of this secular bear. 

in fact, i thik alot of the bearish predictions will come to pass.  who knows which ones...  just like many or even most of the super bullish predictions about tech in the late 90s came to pass.  internet retail business exceeded expecations from that era, CSCO is on the DJIA ... but stock prices went far, far down probably never to return nonetheless.  We may well see something like that here.  Unemployment amy hit 11% which was a radical hyper psycho bearish claim just 6 months ago, the economy may double dip, we may see a sideways sloggish recovery, things may change permanently, all of this.  But that doesn't mean stocks will get lower than they were in march or even close. 

 

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#7) On June 18, 2009 at 2:16 PM, Entrepreneur58 (37.68) wrote:

portefeuille - I would disagree with your date range on the bull market.  In 2000, only the S&P 500 and the tech stocks were at a peak.  There were plenty of cheap stocks in 2000, and I was buying stocks then and I made a lot of money on them.  In 2007, however, there were no cheap stocks to be found.  Seemingly everything was overpriced.  That's why I believe the bull market ended in 2007 rather than 2000.

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#8) On June 18, 2009 at 2:32 PM, checklist34 (99.11) wrote:

this is no prediction...  nor hardly, i offer it just as food for thought. 

many of the huge pillars of the great bull market of 82-2000 are in place right now.

1.  The S&P and other indexes have fallen below the long term trend lines.  This hasn't happened since the 70s

2.  we are in the middle of at least a 12-15 year period where stocks don't go up.  As in from early 2000 to some time in the future we'll have ap eriod of time where stocks aren't significantly up for far, far more than a decade.  This hasn't happened since the onset of the big bull market that started in 82.  Even if we recover nicely here and have even 1 more bear market some years in teh future, we stand a chance at the post-great-depression record for longest streak with no stock appreciation.  we had 9 years from 72 to 82.  we had 12 years from 68 through 1980.  We had about 14 years without significant appreciation from 68 to the 82 bottoms.

Its basically cast in stone that we approach or even exceed those records this time.  We have 12 years with no appreciation already, if we dip below S&P 1400 any time after 2013 we tie or beat the record for histories longest secular bear. 

3.  attitudes twoard the US are severely negative.  we're doomed, just like we were then.  back then the evening news KNEW japan was taking voer and it KNEW that we were doomed and it was all over.  Thats what alot of folks know now.

etc.

This isn't the start of a bear market,if nobody has been paying attention we've been in one for a long time, and its been a REALLY bad one thats seen stocks go down almost 60% over 9 years, which is really not good.

This secular bear may have some more legs, we may not be off to the races anytime soon, we might have another intense localized acute bear market inside the secular bear, who knows.

But it didn't just begin, and its ALREADY lcose to the longest one we've ever seen.

happy hunting folks

 

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#9) On June 18, 2009 at 2:34 PM, portefeuille (98.79) wrote:

portefeuille - I would disagree with your date range on the bull market.

Have a look at the charts corrected for inflation (I am not getting into a discussion on what measure of inflation I am talking about. Take the one you like best.). And look at those charts calculated in other currencies, like JPY, EUR, CAD, AUD, CHF for an even more dramatic effect.

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#10) On June 18, 2009 at 2:42 PM, portefeuille (98.79) wrote:

There were plenty of cheap stocks in 2000, and I was buying stocks then and I made a lot of money on them.

There were, but if you talk about a "bull market" you usually have some "major" indices in mind. Most of those peaked in March 2000 (in real terms).

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#11) On June 18, 2009 at 3:50 PM, Entrepreneur58 (37.68) wrote:

portefeuille and checklist34 - I respect your opinions, but to me the bear market has just begun.  I just can't see it any other way.  Good luck to you...

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