Is it B.S. or a Real Bull?

The U.S. stock indexes are on a nice run of late, building on top of enormous gains from the past year. It begs the question: is it sustainable? There are at least two ways to interpret recent market behavior: (1) it's bullshit, or (2) it's a real bull. For the most part, it seems financial writers and economists are fairly evenly split on the question. Among the published literature on the topic, there is no question that the overall sentiment tilted heavily to the bearish side in the month of February. This month, however, the tide has clearly shifted in favor of the bulls. So who is right? Hopefully the optimists are. Though, there is evidence to suggest that this may be nothing more than wishful thinking.

Much of the recent optimism reminds me of a period not too long ago. After a severe decline of the S&P 500 in 2001, the index saw a strong rebound to a peak in January 2002. The S&P then retraced a bit for the next several weeks. By late February and into March, the markets regained their strength, rising to roughly the same highs set in early January. Optimism was in the air. The hope was that the terrible downturn in the market was finally over, and only blue skies remained.

Here is some of the rosy commentary from late February/early March 2002, provided by the Federal Reserve Board...

"More recently, there have been encouraging signs that economic activity is beginning to firm. Job losses diminished considerably in December and January, and initial claims for unemployment insurance and the level of insured unemployment have reversed their earlier sharp increases. Although motor vehicle purchases have declined appreciably from their blistering fourth-quarter pace, early readings suggest that consumer spending overall has remained very strong early this year. In the business sector, new orders for capital equipment have provided some tentative indications that the deep retrenchment in investment spending could be abating. Meanwhile, purchasing managers in the manufacturing sector report that orders have strengthened and that they view the level of their customers' inventories as being in better balance. Indeed, the increasingly rapid pace of inventory runoff over the course of the last year has left the level of production well below that of sales, suggesting scope for a recovery in output given the current sales pace...

...Subsequent news on economic activity bolstered the view that the economy was beginning to stabilize. The information reviewed at the January 29-30, 2002, FOMC meeting indicated that consumer spending had held up remarkably well, investment orders had firmed further, and the rate of decline in manufacturing production had lessened toward the end of 2001...

...Federal Reserve policymakers are expecting the economy to begin to recover this year from the mild downturn experienced in 2001..."

Euphoric CNBC schmanalysts also chimed in, gloating over previous calls that the economy would recover as early as March 2002.

Following these remarks from the Fed and from the highs in mid March 2002, the S&P 500 rapidly deteriorated, losing about a third of its value in only four months.

Nice one, fellas.

Another comparison comes to mind. In 1929, the Dow Jones Industrial Average lost roughly 50% of its value in a matter of weeks. This period is commonly referred to as "the Crash." Historians will quickly correct this misconception -- the real Crash and the Great Depression came after 1929.

Within a year of the 50% decline of 1929, by mid-1930, the market had recovered about 50% of its value. The sentiment then, as it is now, was that the worst was behind the American economy. Legislators wrangled and wasted away precious time, accomplishing very little in this period because the predominant view was that the economy was on track for a slow but steady rebound.

From the highs set in 1930, the U.S. market would go on to lose almost 90% of its value in a brief 2-year period, bottoming out in 1932. "Do little" President Herbert Hoover was given the boot in 1932, as America called on FDR for New Deal-sized change.

So, is the market as we see it in March 2010, a real bull, or like preceding bear market rallies, nothing more than b.s.?

Over the past 2 weeks, I have compiled data from about 200 articles from a wide range of sources, including economists, hedge fund managers, financial writers, and other investor savvy people, the content of which states unequivocally that the good times are over. I'll be putting a quite a bit of time at the federal courthouse the next two days, and this weekend I will be cranking out a paper that aims to put bullet holes into weak-minded libertarian positions. Despite my frantic schedule, my intention is to find some time over the next few days to filter through the 200 or so articles and provide some of the data I am seeing, and examine whether the numbers suggest we are indeed experiencing déjà vu or something more destructive.

"We live in a world where amnesia is the most wished-for state. When did history become a bad word?" - John Guare

Peace

Jeremy