Unless you pore over stock market charts every day, you may have missed the fact that all the major indexes have climbed by 20 per cent or more in the last six weeks. Is this a sign that things are getting better, and the market is entering a new bullish period? Or is it a sign that investors are hoping for the best, and buying in advance of the facts? Is it a "stealth bull," or another sucker rally?
One of the reasons why you might not have noticed the markets climbing so high is that it has come in spurts — up one day and down the next, with a couple of two-day or three-day rallies thrown in here and there. Meanwhile, the tone of the market has been far from bullish, with a corporate profit picture that has been mixed at best, and continued concerns about corporate spending, consumer confidence and so on.
So what the heck is the Dow Jones average doing at 8,800 or so? At that level, it is up more than 1,500 points since it hit a 52-week low of 7,286 on Oct. 9 — that's a climb of almost 22 per cent. That beats the index's climb in August, when it rose by 17.5 per cent in about a month, hitting 9,053 on Aug. 22. In case you don't remember what happened after that rally, the index lost all that ground and more.
The same goes for the Nasdaq. Many market watchers have said that the tech-heavy index would not be the one to lead investors out of the bear market, because it was the focus of the bubble — and yet, it has climbed by more than 30 per cent from Oct. 9, when it hit a low of 1,114. That was about 21 per cent below the top of its spike in August, which saw the index climb by 18 per cent on bullish hopes.
Take a look at another, broader market measure: the Standard & Poor's 500 index. It climbed by 20 per cent in about a month this summer, to 962 in August — only to lose all that ground over the next few months. Since it hit a low of 776 in early October, it has risen by 20 per cent. Want something even broader? The Russell 2000 index is up over 20 per cent since October, and the Wilshire 5000 is up 21 per cent.
The same story appears when you look at specific sectors of the market, such as semiconductors on the technology side, and financial stocks on the non-technology side. The Philadelphia Semiconductor index is up by almost 70 per cent from the lows of October, and while the climb in the New York Stock Exchange financials index is a little more subdued, it is up by 23 per cent in less than two months.
Networking giant Cisco Systems has seen its stock climb to $14.85 from its low of $8.60 — a jump of 72 per cent. Chip-maker Intel is up by almost 50 per cent in the past month, and Yahoo has seen its stock double in the same period. On-line retailer Amazon has also doubled, as has fibre-optic manufacturer Corning. IBM is up 50 per cent, Juniper Networks is up 60 per cent and Vitesse Semiconductor is up 130 per cent.
Are things 20 per cent to 50 per cent better than they were in early October? It's difficult to see how. Even if you assume that the lows hit that month were too low — given the fact that the Fed has cut rates again, and there are signs of some growth in the U.S. economy — to say the major indexes deserve to be 20 per cent higher is a stretch.
The stock market, of course, is a leading indicator, which means it is focused on the future — and it seems to be saying that things are going to get dramatically better. Unfortunately, the market isn't always right, at least not in the short term. The consensus estimates of 15-per-cent growth for next year (for the S&P 500) may have to come down sharply, just as the estimates for this year had to come down.
"With the best of the post-recession productivity surge behind us, and only so much cost-cutting left and leading indicators pointing to tepid volume growth, there's going to have to be some serious top-line gains in order to generate that consensus 15 per cent profit growth figure next year," Merrill Lynch economist David Rosenberg wrote in a recent report, which he said could mean "another year of disappointment."
When all is said and done, the recent rally is a "dead-cat bounce," Chris Woods of State Street Global Advisers told the Financial Times, using a trader's favourite euphemism for a bounce that doesn't last. In other words, until there are signs that earnings growth is here to stay, a 20 per cent rally is too good to be true.
E-mail Mathew Ingram at mingram@globeandmail.ca
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