Through all the zigs and zags, this market has done diddly squat now for over eight months. You were better off clipping coupons, even at these low bond yield levels. And as for that 80% rally from March/09 to April/10, we wonder aloud how many are going to remember it once we retest the lows â the market rallied 50% in the opening months of 1930, as an example. Do you ever hear anyone today talking about the great rally of 1930? Does anyone today ever have much to say about 1930, or if they do, is it a fond memory? Well, the market rallied 50% at one point that year. Thereâs not much left to say on this one.
For the time being, it probably pays to treat the market as a 1040-1220 decision box as far as the S&P 500 is concerned. Even after the 9% rally of the past two weeks, it is still at the halfway-point of this well-defined range of the past ten months. What is amazing is how Main Street and Wall Street have diverged in recent weeks. The market has rebounded nicely and all we see now is optimistic prognostications about the outlook because of an earnings season that seemed to contain most of its growth in April which was three months ago â meanwhile, what did we see in the July consumer confidence report? That 9% of American households rate business conditions as being âgoodâ.
Are you kidding me? Thatâs all we get with a 0% funds rate, a near 10% deficit/GDP ratio and a $2.3 trillion Fed balance sheet? By way of comparison, back when Lehman failed in September 2008, 13% believed business conditions were âgoodâ, and when Bear Stearns failed in March of that year, the ranking was at 16%. In the wake of the 9-11 tragedy, it was 19%.
Meanwhile, 44% give the business background a âbadâ rating, so the ratio of growth bears to growth bulls in the survey is nearly five-to-one; we doubt you will ever see that sort of ratio among surveyed economists or strategists. Now maybe these people polled by the Conference Board donât know the first thing about the economy, but last we saw, it is consumers that command a 71% share of GDP so their opinions will count if they translate into (in)action.
Those that do not see how abnormal this so-called recovery has been, consider that in expansions, consumer confidence averages 102; in recessions, it averages 71; and we are at 50.4 as of July. So basically, the level of consumer confidence is 20 points below what the average level is during a recession and yet virtually everyone dismisses double-dip risks out of hand. Maybe there is no double-dip because we never really fully emerged from the recession that we know officially began in December 2007 â that was certainly the message out of yesterdayâs confidence report.
THOUGHTS ON THE LONG-TERM OUTLOOK FOR INFLATION
Let me start out by saying that I do not believe that bonds are any âbetter" an investment than stocks, at least in principle. They both have their advantages.
For bonds, the advantages are that they provide an income stream â the principal and the interest payments are guaranteed in the case of most government securities; and in the case of the corporate sector, it inevitably comes down to the quality of the credit and the longevity of the company in question. In addition, the yield at the time of purchase is almost always at some significant positive spread over CPI inflation.
