Why This Time Might Be Different [BRIEFING.COM - Robert Walberg] Last week, we laid out some fundamental and technical reasons explaining why it was too early to officially pronounce an end to the bear market. Today, Briefing.com wants to look at why the current recovery rally might be different from the false starts of the (recent) past, and why the rebound might end up surprising people with its tenacity.
One of the more obvious differences between the current rebound and the other corrective advances over the past 18-months is the fact that this one began from much lower levels. Valuations can still be debated, especially given the continued slide in corporate profitability, but there's no debating fact that most stocks and the three big indices started their ascent from much more depressed levels.
Also no getting around fact that the current move began several months later. Why does this matter? Might not, but as we noted in a Brief back in late September, the bear market (at that point) was the third longest and fourth deepest since the advent of the Great Depression. In other words, the bear was getting a little long in the tooth. As such it's easier to see how the current rebound could grow into something more substantial - like the beginning of the next bull market.
Another big difference between the current move and say the other major counter-rally in April to May - other than the passage of time - is that rates are much lower. Most importantly real rates are much lower. With the Fed continuing to slash the funds rate, especially after the 9/11 terrorist attacks, real rate (funds rate - core CPI) is now negative for the first time since late 1993. While negative real rate suggests limited rate cuts in future, it also points to a more immediate recovery in the economy.
Prospects of a more immediate economic recovery, hinted at by negative real rates, has investors anticipating a turn in corporate profitability. Briefing.com noted on this page last week that the soft comparisons, beginning in Q4, will make it easier for companies to show positive year/year comparisons. Though the actual numbers might not be overly impressive, mere fact that comparisons won't be as negative (for first time in a year) is likely to bolster investor psychology.
Considering the resources (cash) on the sidelines, any improvement in market psychology has potential to become meaningful to the indices as investors are more likely to rotate aggressively back into stocks. In fact, when you combine the lower interest rates, more depressed stock/index prices, extended nature of the bear market, softer earnings comparisons and additional monetary/fiscal stimulus, you can understand why investors are beginning to feel a little better about the market these days.
There are still some major hurdles out there - particularly the US economy and the threat of additional terrorist activity. However, with the Taliban being driven quickly and decisively from Afghanistan, and with recent evidence suggesting that the consumer hasn't curtailed spending anywhere near as much as feared, both of these hurdles look a little smaller today than they did just weeks ago. Briefing.com still thinks it's too early to officially pronounce the bear market history, but it's looking more and more like that day won't be far off.
Robert Walberg
BUT NOT NOW MAN!!!! |
