Bill,
Nice call on the direction of the market, but I'm curious as to what made you turn so bullish. I seem to recall that you were rather bearish during the runup to 9300 and viewed stocks as overvalued. Over the past month, the market has nearly fully recovered from the summer bear market. October, I believe, was the best month in history for the stock market. Smallcaps have roared back and are higher than at the peak on the Dow. So we're roughly back where we were. A lot has changed since then, but I would argue that most of changes have been negative.
- The world economic situation has worsened. Russia is small potatoes, but Brazil, best case, appears headed towards recession. Brazil is the largest economy in Latin America and does significant trade with the U.S. and thus poses a threat to the U.S. economy. Also, I wouldn't discount the possibility of consumer spending slowing. U.S consumers are overextended and over-relying on 20%/yr gains in the stock market to finance their retirements. The savings rate, which just turned negative for the first time since the 30's. This can't continue forever.
- U.S. corporate earnings have been disappointing. Estimates for next year are worse, yet growth projections are still too optimistic. Some of the drivers of earnings growth over the last few years--e.g., falling interest rates and oil prices, layoffs to reduce payroll, etc.--are running out of steam IMO. Earnings are and will continue to be affected by asian competitors which are trying to export their way out of trouble.
The only positive I see is the Fed easing. Certainly, that's a major positive for the market. However, the markets are behaving as if the Fed will ease several more times. Greenspan et al are very concerned about the bubble in financial assets. While the real economy may dictate further easing, the fact that the market has responded so strongly to the rate cut leads me to believe that the Fed will not ease again, at least not right away.
My view is that the economy will continue slowing into '99. Corporate earnings will continue to worsen. But Fed action will be muted by strong stock market. I don't see how we can go much higher. Where do you disagree? |
