If you didn’t know, read or watch anything before October 4, you’d think we were in the strongest economy and strongest market environment ever!
After all, the Dow rallied more than 1,220 points between the low that day and the high on Wednesday. That’s a gain of around 12 percent — the kinds of returns investors are lucky to get over an entire year, much less a week!
So naturally, many investors are asking whether they need to jump on board before it’s too late. They want to know whether this is the start of a new bull market.
My answer? Heck no!!
The March 2009 “Turning Point” Case …
Let me start by laying out the bulls’ case. I believe they’re trying to follow the 2009 playbook. They’re looking at the banking industry stress tests that the U.S. published back in March of that year — and the bank recapitalization plan the U.S. launched — and saying: “Look what happened afterward!”
In case you don’t remember, the market took off like a rocket back then. The Dow rose roughly 2,400 points over a span of just three months before finally taking a breather. Then it climbed even further, ultimately carrying stocks all the way from 6,469 to 12,876 — almost a double!
Since Europe is making noises about doing the same thing — stress testing banks and then recapitalizing the ones who need help — the bulls are just assuming the result will be the same. They’re also looking at the calendar and getting nervous.
They’re figuring they need to make up some performance before the end of the year. Otherwise, they won’t get nice, fat bonuses and won’t be able to buy Hamptons real estate or new Ferraris in 2012. So they’re chasing rallies.
Me? I’m looking at the current environment and asking: “What the heck are these guys thinking? This ain’t March 2009!”
First, the markets had been falling like a rock for several quarters when March 2009 rolled around. The Dow had ALREADY plunged 7,700 points from the October 2007 highs through March 2009.
Second, the economy had also already seen several months of dramatic, recessionary shrinkage. Industrial production, retail sales, home construction, and more had fallen substantially from their peaks.
Third, the Federal Reserve was in the midst of a massive, money-printing scheme — QE1.
Fourth, the $800+ billion economic stimulus package from the Obama administration was signed into law around that time.
In March 2009, the Fed was passing out dollars as fast as it could print them.
The combination of deeply oversold market conditions … an economy that was primed for a recovery (even an anemic one) … hundreds of billions of dollars of free money from the Fed … and almost a trillion dollars more from the administration and Congress provided a huge amount of extremely dry tinder.
All that was needed for a major rally was a spark … and the stress test/recapitalization plan was it!
… And Why It’s Complete Bunk!
This time around, we’ve only lost about 1,500 Dow points from the peak — a pittance compared to 2007-2009! So it’s not like investors have already lost their shirts, and stocks look extremely cheap.
This time around, we’re only now entering a second recessionary period, rather than reaching the end of one. Unemployment is still on the rise, recently hitting 16.5 percent if you include all discouraged and underemployed workers. Layoff announcements surged 212 percent from a year ago in September, consumer confidence is plumbing depths it hasn’t seen since 2009, and home sales and construction activity are falling again, not rising.
This time around, there is NO QE3 plan out there to support the markets. The Fed could barely get the weak-kneed “Operation Twist” plan past his deeply divided policy committee, making another round of money printing an impossibility.
And most importantly of all, this time around governments around the world are tapped out! They don’t have the money to infuse hundreds of billions of dollars into the global banking system to prop it up, much less provide another trillion of fiscal stimulus.
Just witness the defeat of President Obama’s $447 billion jobs plan in the Senate this week, or the recent multiple-notch downgrades of the credit ratings of Italy and Spain!
Bottom line: Neither the fundamentals nor the technicals support the case for a massive bull run!
So my recommendation couldn’t be more clear: Don’t chase the year-end bonus crowd! They’re only going to regret it!
Until next time,
P.S. I’m convinced more than ever that we are entering a new bear market, and a double-dip recession. And if you do NOT follow the powerful, step-by-step instructions Martin and I give here — to both protect your wealth and profit — I believe you’re going to regret it.