msnbc.com
SINCE THE MARKET bottomed at on Sept. 21 at 8,235 on the Dow industrials, the Dow has risen a startling 20 percent through the end of November, and the Nasdaq Composite has soared an even more dramatic 36 percent. Last week brought more of the same, with the Dow rising another 339 points in spite of a small give-back on Friday, and the Nasdaq moving up more than 100 points as well.
Numbers like these recall the market surge that began in the autumn of 1998, when the Nasdaq touched a low of 1,510 on Oct. 10, then surged an almost identical 361 points, to reach 1,949 by the end of November.
There are similarities here that run deeper than just the raw numbers. In the autumn of both 1998 and 2001 there were global political crises that shook financial systems not just in the U.S. but worldwide. In 1998 the crisis involved the collapse of the Russian ruble and a resulting panic that spread through the ranks of international hedge funds, eventually causing the collapse of the biggest hedge fund in the U.S. - Long Term Capital Management of Greenwich, Conn.
In 2001, it wasn’t the collapse of a hedge fund that shook the world but the collapse of the World Trade Center as a result of the terrorist attacks of Sept. 11.
In both cases, the result was an almost immediate freezing up of world financial markets, followed, in the case of the 9/11 crisis, by the deepening of the economic downturn that had already pushed the economy into recession. And in both cases the Federal Reserve responded to the crises by opening the fire hydrant of dollar liquidity and drenching Wall Street and the banking system in money.
No analyst today doubts that the tremendous surge in liquidity in the autumn of 1998 spurred the final, blowout phase of the bull market of the 1990s, creating the unprecedented 246 percent run-up in tech stocks that came to an end in March of 2000.
The only question now is whether the stock market will behave the same way all over again, continuing the rally that began on Sept. 21 and creating a whole new bubble in equities.
Data provided
by CNBC on MSN Money
SOME CAUSE FOR COMFORT
So far, there is not a lot to give comfort that something like that is not in the cards. Without economic growth, business investment is bound to stay flat because companies to not invest unless there is a reasonable likelihood of being able to sell what they wind up producing. And right now, the productive capacity of American business is still being unwound from the capital spending binge of the 1990s.
So, for the moment at least, consumers remain the only engine available to pull the economy back onto a growth track. But 10 straight reductions in short-term interest rates by the Fed since last January have, at most, simply kept the economy from slipping any faster than it has - and there’s actually no way to show that the rate cuts have accomplished even that. Another cut is expected Tuesday from the Fed, at its regular meeting of the Federal Open Market Committee meeting. But no one can point to any evidence that the economy, or consumers, will respond to this cut any differently from the others.
Rate change history
Changes in the Federal Reserve's target for the federal funds and discount rates going back to the early 1990s, when the last recession began.
| 1 | 2 | 3 | 4 | 5
DATE FUNDS RATE DISCOUNT RATE
11/06/01 2.00% 1.50%
10/02/01 2.50% 2.00%
09/17/01 3.00% 2.50%
08/21/01 3.50% 3.00%
06/27/01 3.75% 3.25%
05/15/01 4.00% 3.50%
04/18/01 4.50% 4.00%
03/20/01 5.00% 4.50%
01/31/01 5.50% 5.00%
01/04/01 6.00% 5.50%
01/03/01 6.00% 5.75%
| 1 | 2 | 3 | 4 | 5
DATE FUNDS RATE DISCOUNT RATE
05/16/00 6.50% 6.00%
03/21/00 6.00% 5.50%
02/02/00 5.75% 5.25%
11/16/99 5.50% 5.00%
08/24/99 5.25% 4.75%
06/30/99 5.00% 4.50%
11/17/98 4.75% 4.50%
10/15/98 5.00% 4.75%
09/29/98 5.25% 5.00%
03/25/97 5.50% 5.00%
01/31/96 5.25% 5.00%
| 1 | 2 | 3 | 4 | 5
DATE FUNDS RATE DISCOUNT RATE
12/19/95 5.50% 5.25%
07/06/95 5.75% 5.25%
02/01/95 6.00% 5.25%
11/15/94 5.50% 4.75%
08/16/94 4.75% 4.00%
05/17/94 4.25% 3.50%
04/18/94 3.75% 3.00%
03/22/94 3.50% 3.00%
02/04/94 3.25% 3.00%
09/04/92 3.00% 3.00%
07/02/92 3.25% 3.00%
| 1 | 2 | 3 | 4 | 5
DATE FUNDS RATE DISCOUNT RATE
04/09/92 3.75% 3.50%
12/20/91 4.00% 3.50%
12/06/91 4.50% 4.50%
11/06/91 4.75% 4.50%
10/30/91 5.00% 5.00%
09/13/91 5.25% 5.00%
08/06/91 5.50% 5.50%
04/30/91 5.75% 5.50%
03/08/91 6.00% 6.00%
02/01/91 6.25% 6.00%
01/04/91 6.75% 6.50%
| 1 | 2 | 3 | 4 | 5
DATE FUNDS RATE DISCOUNT RATE
12/18/90 7.00% 6.50%
12/07/90 7.25% 7.00%
11/14/90 7.50% 7.00%
10/29/90 7.75% 7.00%
07/13/90 8.00% 7.00%
SOURCE: Associated Press
Yet bank liquidity has to go somewhere, and if it doesn’t go into consumer spending, and it doesn’t go into capital investment, the only other place it can easily flow is back into stocks, especially when interest rates have now been driven so low that the inflation-adjusted return on them is functionally zero.
There is, in fact, a huge amount of money still sitting on the sidelines of Wall Street, waiting to flow back into the game. Money market funds are now bulging with $2.1 trillion in liquid assets — the highest level in history — that can easily flow back into stocks at a moment’s notice.
More than half that money is under the control of a relative handful of institutional money managers, who all basically watch each other in order to do what everyone else is doing. Most are compensated not on the basis on their absolute performance but rather on how well they do, relatively speaking, against their peer group of managers. This means they are ever on their tiptoes to begin stampeding off in one direction or another as soon as it looks like everyone else is doing the same thing.
WAITING TO INFLATE THE BUBBLE
With so much money now waiting on the sidelines, and with the money managers who control the funds now, figuratively speaking, nearly leaning into fair territory to get back in the game, it wouldn’t take a lot to send stocks on the same explosive ride they took in 1998. One or two bits of unexpectedly good news - a big jump in retails sales (Thursday) or maybe a pickup in industrial production (Friday) — and the market could be off like a shot.
Yet it would be well to remember what happened the last time the money men of Wall Street passed this way. In the autumn of 1998 there was at least the illusion of corporate profitability, conjured from the financial engineering of a decade of deals backed by bull market paper, to keep the game going - and even at that it nonetheless all ended badly… in barely 16 months’ time. Absent a recovery in corporate profits - which no one thinks likely anytime soon - this rally too could end quite painfully… and maybe a whole lot sooner and more suddenly as well.
One calls such an event a “bear trap rally,” and if it gets going, that is exactly what I think it will be. So beware. On Wall Street as elsewhere, you can never know when the trap will snap shut. |
