Market Commentary – August 24, 2009

General Market Comment:    August 24, 2009

 Last week I opened with this comment . . . “The market may have begun a long anticipated correction.  It might be a short one”  It looks like was indeed a short one – only two days.  All the major indexes made new highs for the year on Friday.  The current “rally” or dare we say – “bull market” has seen the S&P 500 rise 51.68% over 165 days.  This is now clearly exceeding the strength and duration of historical “dead cat bounces”.  The bright folks at Bespoke Investment Group were kind enough to produce the following table of bull markets since 1927.

 ScreenHunter_01 Aug. 25 13.24

They shaded the dead cat bounces often noted by market historians that took place in the Depression.  Usually the bears point out that the S&P 500 went on to drop an overall 86% by the time they heard the “thud” in 1932.  To that we should say . . . “So?”

 Rather than be entirely consumed with history – although you all know I am an avid student of market history – we should try to stay focused on the drivers of market activity.  Things can in fact be “different this time”.  What has driven the current bull market and what will drive it forward?

 To over simplify, the answer is of course earnings expectations.  Here is an excerpt from a report prepared by Thomson Reuters this month on the outlook for earnings growth as incorporated in consensus earnings estimates for the S&P 500.

 ScreenHunter_02 Aug. 25 13.24


 You will hopefully note the happy consequence of ~185% year over year growth in S&P 500 earnings in Q4.  2010 earnings growth is no slouch either.  Realization by money managers of improving earnings combined with under exposure to equities will possibly create a Three Stooges moment when they all try to get through the door (i.e. get fully invested) at the same time.

I am becoming more persuaded we will not see any material correction (i.e. down 10% or so) as we move toward Q4.  The implication is we won’t see one till Spring 2010.  That sounds aggressive but that is how the facts are laying out.