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Everyone rushes to cheer at the wicked old bear's funeral
By MATHEW INGRAM
Like the delirious munchkins in The Wizard of Oz, investors are joining hands and humming a merry tune to celebrate the end of the wicked old bear market, which has apparently melted away thanks to the end of the war, low mortgage rates, cash giveaways by car companies and a weak U.S. dollar. Anyone who points to a conspicuous lack of fundamental improvement in the U.S. economy risks being ridiculed as a stick-in-the-mud.
According to market technicians -- they're the ones in the corner, huddled over their stock charts and muttering about stochastic oscillators -- the major stock indexes have already confirmed the end of the bear market and the birth of a spanking new bull market. The Nasdaq index is up almost 45 per cent from its lows of last October, the Dow is up 20 per cent, and even the broader Standard & Poor's 500 index is up about 25 per cent.
This meets the technical definition of a bull market, a rise of 20 per cent. But does it pass the smell test? The major indexes rocketed higher after Sept. 11, 2001, too -- the Dow climbed 25 per cent between September and January, 2002, and the S&P 500 rose 20 per cent and the Nasdaq jumped 45 per cent. Was that the start of a new bull market? Hardly. In the spring of 2001, the major indexes jumped almost 20 per cent in a month, with the Nasdaq up 35 per cent. Was that a new bull? Far from it.
Some technical traders are looking for more than just a 20-per-cent rise. They're looking at the number 9,053.6, which is the high-water points mark the Dow set last August. Looking at a chart of the index over the past year, they see a pattern of lower lows and lower highs, meaning each time the Dow moves up it has failed to pass its previous high, and each time it moves lower it sets a new low. Passing 9,053 would end that trend.
Technical voodoo aside, however, there is little objective evidence that things are improving dramatically in the U.S. economy, or even the global economy. Apart from the end of the war and a few helpful events such as a drop in the U.S. dollar, there is little that makes the current environment 30 or 40 per cent better than it was in October. Yes, interest rates are low -- just as they were last year. Yes, profits seem to be improving -- thanks to cost cutting achieved through layoffs and closings.
It's true that the low U.S. dollar will help manufacturers, and particularly exporters. Unfortunately, it will also help China, because the yuan is pegged to the greenback. And what country is one of the biggest contributors to the U.S. trade deficit? China.
As for the Bush tax cut, the debate continues over whether it will act as an economic stimulus and, if so, to what extent. Fed chairman Alan Greenspan said yesterday that the economy has seen a "marked turnaround," but also that "the acceleration has not yet begun."
On the stock market, however, the acceleration has been under way for some time.
In fact, in a twist of logic only economists can get away with, part of the evidence Mr. Greenspan cites for his view that the economy has turned around is the climb in the stock market -- because markets are forward-looking indicators. Of course, his remarks will then be used by analysts as evidence that even higher prices are justified.
At this point, traders are falling all over each other, afraid of missing the rebound.
Many institutions are no doubt motivated by a desire to make back some of the money their funds have lost over the past few years, which adds fuel to a rise when one begins. Valuations that seemed absurd last year -- 50 or 60 times earnings for the stars of the Nasdaq -- are rationalized by the fact that next year things should be better.
Could things be dramatically better next year? They could be. Or they could be more or less the same as they are now -- in which case, you're paying way too much for most of those stocks. So far, there has been little evidence of a pickup in the areas of the economy that count, such as manufacturing. Yes, people are still buying houses and cars, but the job market remains in the dumpster, and although the ISM index of purchasing activity was better than some expected, the sector is still contracting.
For the third year in a row, the market has seen a sharp runup in the first half of the year based on the hope of a second-half recovery -- and we know how the movie ended those first two times. Will the third time be the charm? Will the U.S. economy not only recover but start to accelerate at a healthy speed? It had better -- investors are already paying for it.
Mathew Ingram writes analysis and commentary for globeandmail.com.
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