I'm bullish,now.
Very, very bullish.
Reasons:
1. Fed Funds at 2.5%, down from 6.5%. 30Y fixed mortgages below 7%, continuing a longterm decline. This, all by itself, no matter what else is happening, ought to make investors bullish. There is no pattern more robust, more reliable, than the response of stocks and the economy to interest rate changes.
2. The maximum effect on the economy of Fed Funds changes is 18 months later. Stocks anticipate economic changes by 6 months. So, the time lag (rate changes to stock prices) is 12 months. 12 months from the beginning of this rate cut cycle is January 2002, and we're almost there.
3. I have been saying, for a long time, that bad things were going to happen. I have said this in detail, all this year, and most of last year, and have been wondering why the consensus was so much more optimistic than my outlook. No, I didn't predict Sept. 11. IMO, that just hurried up an inevitable process (speaking strictly about stock prices). The consensus now (and only now) is: a recession is inevitable, a secular bear market lasting a decade is a possibility, consumer spending is going into a sharp decline, forward earnings estimates are random numbers, the term "pro forma earnings" should be met with laughter and derision, and, in general, the future looks uncertain and dark. Finally, the consensus has come around to my point of view. Which means, finally, that it's in the stocks.
4. The initial response of the market to a Fed Funds rate of 2.5% (a level not seen since Kennedy was President), is.......nothing. In a rational world, this would be a reason for a huge rally. The non-response indicates sentiment is at a nadir. I remember, back in 1999, how the market rallied every time the Fed raised rates. I posted at the time that this was irrational. It's still irrational, and indicates sentiment has swung to another unsustainable extreme.
5. People are making all kinds of analogies to 1990 Japan, 1973, and 1929. IMO, it's just not that bad. If you look at the numbers (employment, inflation, interest rates), things are much better now. If you look at the structural problems that caused 1990s Japan and 1930s USA, they don't exist in today's America. 2 years from now, we are going to recognize this as an average, garden-variety recession, compounded by an "exogenous shock". All the apocalyptic talk is just FUD.
6. Speaking of the "shock": the essential quality of that shock, is that it is temporary and limited. We will learn to live with the continual threat of low-level attacks. There will be an ongoing battle, and we will lose some of those battles. We will get used to it, and life will go on, more or less unchanged, for 99% of us. There is no country, at any time in history, that has had our current Global Reach, our ability to influence events everywhere. The only caveats here, is if a terrorist organization acquires and uses a weapon of mass destruction. If that happens, there is nowhere to hide, financially or otherwise, so I'm just assuming it won't. Sort of like we lived our lives during the Cold War, assuming the Soviet ICBMs hadn't just been launched.
I'll make a prediction: Sometime between now and June 2002, the Nas and SOX will make at least one 50% rally, from the recent lows. |
