General Market Comment: January 4, 2010
The fear du jour is appropriately that the recent run up in the stock market is due for a sharp correction. There are some so bearish as to call for a retest of the deep lows of last March. To be sure the surge in equities has been record breaking. The NASDAQ rose 44% in 2009. While that is impressive keep in mind that in 2003, the NASDAQ rose 52.5% in the twelve months ended September 2003. It rose 56.8% in the twelve months ending December 1991 and it rose 86% in the twelve months ended June 1983.
What was common to all of the time frames? The economy was recovering from a recession.
So what happened afterwards? That’s a loaded question obviously. The market certainly corrected ultimately but I believe that we are still in front of the peak in the market compared to those prior periods. I believe the case can be made we remain in the very early days of the economic recovery and should have prolonged period of equity value growth well into the second half of 2010.
I say that for several reasons.
a) we have not seen the peak in earnings growth.
b) we have not seen a flattening in the yield curve.
c) we have not seen the retail investors throw caution to the wind and pile into equities.
It is my intention to expand on each of those points in the coming days however suffice to say that the data at our doorstep this week and this month will serve to solidify the case for earnings and economic recovery.
One data point to keep in mind as the data piles up is the total disregard retail investors have shown to equities in the last 12 months. Retail and institutional investors have poured an unprecedented $349 billion into bond mutual funds through the 11 months ended November. At the same time they withdrew $4.7 billion from equity mutual funds. They withdrew $30.2 billion from U.S. focused equity mutual funds. This is beyond – silly – its insane.
Keeping in mind the incredible bias for fixed income described above notice that when the NASDAQ appreciated 52.5% in the 2003 economic recovery there were INFLOWS of $151 billion into equity mutual funds. Accordingly, the rise in the equity market in 2009 is even more remarkable in light of the absence of material capital inflows – that may change in 2010. When and if the investing public begins to re-enter the equity market we will be able to expect a market value gearing of as much as 10X the amount of capital invested in stocks . . . “sweet”.
Here is a quote from a recent newsletter – ChangeWave Investing by Tobin Smith – that I felt does a good job framing the exquisitely contrarian circumstance we now have in the market.
It’s official — equities are dead. Bah! Humbug! That proclamation was more or less issued in an article from Institutional Investor magazine. In it, the reporter argued that investors are “questioning the conventional wisdom that stocks outperform bonds. They’re systematically pulling back from equities, and Wall Street will never be the same. The equity party is over.”
Indeed, investors rattled by tumultuous stock market volatility have sought safer and more-consistent returns in fixed income — as well as in other alternatives, such as real estate and commodities . . . .
. . . Our take on equities is simple: If the financial media is ready to declare stocks dead — we want to own them. This is one of the most bullish signs we’ve seen in a long time and though it’s very unscientific, it’s nevertheless encouraging.
Who can ever forget BusinessWeek’s cover in 1979 when the magazine declared, “Death of Equities”? With Bloomberg now its owner, however, the publication isn’t likely to make the same mistake.
Equities may be down from their illustrious heights of the 1990s, but investors in the United States and around the globe will continue to want to own a piece of the action in what is still the world’s biggest and best economy.
That should do for now.
I suspect there will be some selling pressure in the coming days as gains from 2009 were pushed into a new tax year. The selling will heralded with relief from the market technicians. Earnings and improving macro data including potentially improved labor metrics as soon as this Friday should provide the foundation for the next leg up.
2010 will be a remarkable year. Don’t allow your fears to overcome your logic. Rational exposure to innovative growth companies such those followed by Aberdeen has a role in everyone’s portfolio.