Stock market commentators are starting to speculate that the downturn since mid-October may have largely run its course. April 15, Tax Day, will be six months into this doom-and-gloom, and tax-selling should have run its course. Our friend Prythroes says sharp volatility is the sign of a bottom, not a top. Consumer confidence is at its lowest point in 35 years, but spring is here and we're all getting $600 government stimulus checks in May. Can confidence go anywhere but up?
Now that Bear Stearns, Wall Street's 5th largest investment bank, is being rescued at a price 4-times the initial offer, "The Global Guru" reports that the S&P financial index "has soared a breathtaking 18%." Homebuilder stocks are up 70% (!) from their January lows; Lennar, a major participant, has gained 30% in the last five trading days; and the broad S&P-500 is up almost 6% from its recent low just yesterday. The dollar is down overseas, boding well for U.S. export jobs and foreign shares. Seems to us that the smart money may be toeing the investment waters.
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Midway through 2002, S&P 500 stood at 825 (end-June). Now 69 months later (end-March 2008), compounded annual rate is 100 x ((1350/825)^1/69)^12 = 8.94% PA, approximating the broad market's long-term nominal rate of 8.50% PA.
Using this remarkably stable baseline trend, U.S. domestic equities may reach about 825 x 1.085^6.5 = 1402 by year-end (12/31/08). This would leave us 9.67% below last year's peak at 1550, but unchanged over 27 months from September 2006.
Presidential election years virtually never tip markets into an abyss-- witness Bernanke's frantic reflation efforts plus Congress' doofus $600/constituent rebate buyoff. (We'll take it, but-- holy cow.) At its considerable worst, a McCain administration would not approach the active economic sabotage in prospect from MzBill or feckless ideologues such as Obama or Al Gore of the hobnailed footprint.
Absent global recession, having dodged the D-rat bullet come November, markets may yet close above S&P 1500 in '08. No big deal... compounding from June-2002 would still be only 9.63%. But, hey-- MzBill would take equities to minimum 1150 in quite short order, and at the resulting 5.24% our 78-month CAR would discount equities to risk-free bank rates, in reality lower than inflation.
When ever-increasing systemic risk rewards investors with below-zero returns, will venture-capital leap to fill the breach? Boy, have we got a spreading chestnut tree for you!
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