Every now and then you will come across something that sparks your curiosity and leads to further investigation. Such an occurrence for me came when I read the Dallas Fed September 2007 Economic Letter, “The ‘Great Moderation’ in Output and Employment Volatility: An Update.” I was intrigued by the clear shift in economic volatility as measured by real GDP and employment that occurred in the early 1980s.
Stepping back and taking a weight of the evidence approach to analyzing the stock market and economy suggests that the economic expansion that began last year continues, and so too the cyclical bull market that was given life in March of 2009. The biggest support to this opinion comes from looking at both economic and stock market breadth, which shows strong participation in the stock market and improving economic statistics in which the economic recovery is spreading.
The Amphora Report
Much financial market attention has focused on China of late. Frustrated by China’s apparent unwillingness to allow their currency, the yuan (or renminbi) to appreciate, influential members of the US Senate—most notably Charles Schumer—apparently are once again seriously considering labelling China a “currency manipulator”. If they follow through on this threat, certain punitive US actions on trade relations with China would follow more or less automatically, unless President Obama were to oppose them.
Two common themes I have been writing about over the last six months are sector rotation and contrary investing. I believe we are still within the confines of a secular bear market, and in that context asset allocation (stocks vs. bonds vs. commodities, sector weighting) will likely play a key role in investor returns as it did in the 1970s secular bear market.
April in fact has been the best month for the DJIA since 1950. In the past 21 years April has also been the best performing month for the S&P 500. April 1999 was the first and only month for the DJIA to post a gain of 1,000 points. Since 1950 April typically is a good month for stocks and ends the “Best Six Months” (November-April) for the Dow Jones Industrial Average and S&P 500. This bodes well for April 2010, correct? Not necessarily. This April, other factors come into play that may not give us the spring cheer we expect:
The U.S. dollar has enjoyed a free ride since Europe’s economic troubles with Greece. Sovereign debt downgrades had encouraged assets to begin leaving the European region causing the euro to drop. The euro zone’s current account balance fell pretty strongly in January. The balance fell to a deficit of 16.7 billion euros (unadjusted) from a revised 9.8 billion euro surplus in December.
Loving the Unloved
The essence of contrary investing is going against the crowd, where one buys when the public sells and sells when the public buys. If the bulk of people believe that a certain outcome will occur, such as a higher future stock market, then they are likely already invested, and when there is no one left to buy the opposite typically happens in which a market selloff ensues.
Using the 1970s Secular Bear Market as an Analog to What May Lay Ahead
Over the course of the last two years I’ve frequently taken a step back to look at the big picture in terms of secular trends (decade long cycles) versus the cyclical trends (year long cycles) in the stock market. Looking at past cycles and current trends I estimate a secular bear market low will occur in 2014 to 2015. The support for this estimation can be found in the following three articles below.
News today that Greece will seriously work on cutting their budget deficit sent the global markets rallying today. Details from Greece’s proposed measures are provided below from a Bloomberg article: