Do you think the US glory days are over or, at a minimum, that we’re on the verge of a new downturn?
In his weekly note, Raymond James’ Jeff Saut offers up a great batch of history for those who think the US is facing some crisis of historic proportions.
He starts off with this quote, which sounds very familiar…
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“We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the century is over; that the rapid improvement in the standard of life is now going to slow down; that a decline in prosperity is more likely than an improvement in the decade which lies ahead.”
It turns out, that was from John Maynard Keynes, and it was said in 1930.
Then Saut passes a long a message from a London-based investor, pondering the last time the US was at risk of a double-dip recession.
“There may be no value in drawing comparisons with past market patterns, but I find it irresistible. In 1994 I was a U.S. portfolio manager and the debate of the day was whether the U.S. economy would succumb to recession. If my memory is correct, the term ‘double-dip’ was coined at this time as the U.S. was still suffering the hangover from the Savings & Loan crisis that had exacerbated the 1991 recession. Despite this background of doom and gloom the S&P 500 advanced by 34% in 1995.
Lest you think there was much less to worry about back then, here are some of the headlines:
Nov 1994 – Norwegian voters decide not to join the European Union.
Dec 1994 – Boris Yeltsin orders troops into Chechnya.
Dec 1994 – Mexican Tequila Crisis – ‘unleashing the Tequila effect on global financial markets.’ The U.S. agrees to a bail-out.
Jan 1995 – Kobe Earthquake in Japan. Feb 1995 – Barings collapses due to speculative trading by Nick Leeson.
Apr 1995 – Oklahoma City bombing kills 168 people.
Jun 1995 – Iraq disarmament crisis. . . .
you get the picture – plenty to worry about – plus ca change.
So a prudent man may have been tempted to hold back from investing in early 1995, but that would have been foolish. The market rose in 7 of the first 8 weeks of the year. By the end of February the S&P 500 was up 6%, and then rose nearly 3% in March, another 3% in April and over 3% in May. By the time most of the Cassandras were re-evaluating their position the S&P 500 had advanced ~20%.
That’s my point: don’t stand back and deny the move; participate. I was the prudent man.”
Saut’s bottom line for the week?
This is not the time to be bearish.
The turtle makes no progress until it sticks its neck out; I have been sticking my neck out since Thanksgiving, believing the Santa rally was beginning. I stuck with that strategy until the first day of trading this year, which felt like a short-term emotional trading peak. A short-term price peak occurred on 1/10/12 at 1296.46 basis the SPX, as chronicled in these missives. The only question in my mind was whether we were going to get a pullback into the 1230 – 1240 support zone, or if we would experience a sideways correction as the overbought condition was worked off and the market’s internal energy was rebuilt. So far it’s been a sideways correction, leaving the NYSE McClellan Oscillator not overbought, but not oversold either. In fact, it is hovering around the neutral line. Meanwhile, the stock market’s internal energy is almost fully recharged. And this morning we are greeted with better than expected Chinese GDP growth (+8.9% vs. +8.7%E), a worldwide interest rate easing cycle, the largest jump in German investor confidence ever, a decent Spanish bond auction, and hints of another round of quantitative easing.
The result has the pre-opening S&P 500 futures up double digits, precious metals sharply higher, crude oil back above $100/bbl., and a lower U.S. dollar. Accordingly, while I would have liked to see more of a pullback to a minimum of 1250 – 1260, I’ll say it again – I think it is a mistake to become too bearish . . .