Four Reasons Stock Market Hope Will Overcome Despair

We have gone from the penthouse to the outhouse in one year. The S&P 500 is currently down 45% from its high. The crux of our problems can be simplified into two areas: leverage and consumer confidence. Hedge fund redemptions have put unprecedented pressure on our markets and further plunges in consumer activity threaten to put our economy into a depression. The triggers of the Great Depression can be argued, but the root cause is agreed by all - consumers dried up. Confidence was lost.

It appears we are at a crossroads before this holiday season where we will either hunker down and stop spending or we will regain hope that we can survive the great crisis of 2008. Here are some reasons why hope will trump despair in intermediate market performance:

1. Stimulus part 2. Fundamental effects of the stimulus plan can be debated. Many economists are against them. To those economists I would say one thing - sentiment and confidence are just as important to the market as the fundamentals.

World leaders embarked upon the G20 economic summit this past Saturday. This meeting is going to light a fire of coordinated, global stimulus. Do you think world leaders are going to sit back and allow a recession to turn into a depression? No way. They are going to be doing everything in their power to thwart this disaster.

We have the tools to manage our way through this downturn and you better believe we're going to use them. If you think this recession might last another 12 months, remember it is the government's responsibility to keep hope alive once a quarter, stringing investors along with reasons to be invested. I expect our government will pass the mother of all stimulus packages before the holiday season. A $1 trillion package to be implemented over four quarters would restore confidence in our ability to manage our way out of this mess.

Investors are too quick to assume that we can't manage our way out of this downturn. Congress will be back in session next week to figure out the automotive reorganization and I'm sure it'll talk stimulus as well.

2. We have learned from history. Ben Bernanke and Hank Paulson have been the right men in the right jobs at the right time. Paulson was able to command the respect of financial CEOs and implement a coordinated plan to stave off systematic bank failure. No deposits were lost. Although he has been recently criticized for his decision to not purchase troubled assets, in the long run this is a brilliant move by the Treasury Secretary. He is investing these funds where they will do the most good. He is helping the financial world to deleverage itself at warp speed.

The next step will be to repeal mark-to-market accounting as Europe has already done. This should happen around January 2nd when the SEC presents its formal recommendations. We will wake up in 2009 and realize that Bank of America (BAC), JP Morgan Chase (JPM), and Wells Fargo (WFC) are screaming buys. Bernanke has been equally as good. He is doing everything within the Fed's power to thaw lending and keep rates low.

3. There are no bread lines, only Apple (AAPL) iPhone lines. Interestingly enough, stock prices suggest the opposite. We haven't sold off like this since the Depression. Even during the inflation crisis of the 1970's, the most we ever sold off was 17%. Being down 40% on the year must be very scary for market bears. Everyone wants to tell you that valuations don't matter but I have a secret for you - they do. It's hard to find a stock with a p/e over 20 anymore. Apple's market cap is down to $79 billion and yet it will have $30 billion in cash on its balance sheet by year end.

Apple's not the only one either. Corporate America has never been more fiscally responsible. Record amounts of cash sit on balance sheets across many different sectors. Leverage has been limited to consumers and banks.

4. Outstanding credit card debt sits at $971 billion for the United States. This amounts to approximately $3,000 per person. This problem is nowhere near the problems that we were faced with earlier in the year in the financial sector. Government stimulus can easily fix the problem of consumer leverage. With a shot of confidence, the consumer will prove resilient once again.

In conclusion, our country just elected a president who ran his campaign based on hope. He will do everything in his power to restore hope in order to stabilize this economy. Be careful betting against our ability to manage through this recession. We know the lessons of the past and will not let a depression happen again.

This weekend's G20 economic summit will be the beginning of a lot of hope entering the markets. There are times when the darkness may seem unbearable, when everything around us contradicts hope; do not surrender to this temptation when the market has already sold off so much. Doubt and despair could lead us into a depression but I'm not betting on it. Sentiment can change in a heartbeat and it will. After all, this is the season of change.

Disclosure: Long AAPL, BAC.

Comments

[investor88:]

Good logic and positive attitude. Agree sentiment can change in a heartbeat. However the sky is dark and better to put stop loss/sell stop until the market really improves?

Someone wise said do not lead the market [predict/anticipate], just follow the market and let it tell us. This is hard to do, as difficult as buy low sell high, however the logic is there.

2008 Nov 16 05:40 AM

[The Small T...:]

Let me summarize your reasons:
1) World Govs will save us
2) US Gov moves were brillant. Mark-to-market acctg is part of the problem.
3) There is still frantic consumption
4) We are still in debt, but if we consume again all will be ok.

Well, this is the irresponsible view that has bring has near to the brink.
Well let me comment some of them:

1) For sure world Gov want to avoid a depression. Problem is that they not necessarily can. The G20 met this weekend. Result: Good will declaration only. Setup a target date by April to come out with recommendations. We are assisting to a shift in power, and the G20 new financial plan preparation will not be a collaborative analysis group, but a battlefield of economical power. Don't be so sure that cooler minds will prevail.

2) I won't argue about brightness of US financial officers' decisions. I personally think they were and are plain wrong. They are not working to add transparency via toxic papers clarification, but trying to hide the garbage behind the carpet. Future will prove who's wrong.

(Interestingly, now the bright Paulson has discovered that the UK plan to buy stocks on banks is a better strategy, compared with his initial plan of just buying toxic assets at near-to-face value that he strongly supported before the US Congress.)

In your article, what is wrong is blaming the mark-to-market accounting practices. They are here to prevent Enron-like frauds. If that alarm is now sounding in almost all the financial system... well, that is indicating a major problem in the system, not that the alarms are wrong.

3) Frantic consumption, based on debt. That means that the US comsuption patterns have not changed.

4) Consuming more than you can afford will lead you to more problems, it is not the solution.

You are looking the world through rose colorated glasses.

2008 Nov 16 08:00 AM

[jepittman:]

I am in general agreement with the author. You can add to his list an extremely positvely sloped yield curve. This means there are powerful incentives for banks to borrow short term money at cheap rates and lend for longer time periods at much higher rates. I remember well the same situation during the 1990 banking crisis. It did not work immediatly to end the recession but over time it served to recapitalize the banks. Within a few quarters the banks were solidy profitable again and their share prices recovered.

2008 Nov 16 08:56 AM

[jepittman:]

I have posted this point elsewhere on this site but I will also add it here. There will be a very substantial fiscal stimulus package passed early next year by the new Congress and signed almost immediatly by President Obama. The democrats want to deliver a prosperous economy back to the American people and place the blame for the recession squarely on the republicans. This will be a key to winning the interm elections in two years. Now I know many of you are republicans and will want to argue this but my point here is the stock market and the economy will be affected by this. In my view a large fiscal stimulus package in combination with a full court press from the Fedral Reserve in the credit markets along with a very charismatic and popular President will put a floor under the decline in the economy. As soon as the market can reliably ascertain the depth of the recession a significant unknown will be removed and buyers will appear in large numbers. If a resonable degree of confidence can be restored even if the economic numbers are still trending sharply downward the stock market will rise rapidly and when it is least expected to do so.

PS I am a registered Republican

2008 Nov 16 09:13 AM

[athena:]

Did everyone forget the deficit? Watch how our long term rates will climb.
See Moodys downgrade US debt.
Then see what your stocks will do.
Time to go back to econ school for a refresher course.

2008 Nov 16 09:38 AM

[Fabien Hug:]

I took us many years to come here. Things went out of control after 2001 and, as per what I read, lax monetary policies started long before.
So, if I appreciate some optimism, I still doubt things will get that rosy after less than a year of reevaluation and I think that athena comments are short and straight to the point.

2008 Nov 16 10:31 AM

[ArtfulDodger:]

Jason, very well thought out and written article. Whether we like the government throwing all this money into the economy or not, surely reasoning people have to recognize that it's going to cause monetary movement.

It’s Keynesian—yes. I don’t like it—no. But it will cause things to perk up for a while. Everytime you pour more water into a pool it’s going to cause waves. Well, over $2 trillion thrown into a $14 trillion US economy and almost $600 billion tossed into China’s $3.3 trillion economy will cause tidal waves—just not overnight, as so many wish for.

Nevertheless, you're gonna catch hell on this site for an article that goes against which way the markets are going.

This site is filled with market followers. When one is going down, they think it's never going to stop. When up, the opposite.

I went against them when they were all oil bulls and they wanted to string me up.

My advice, get a bodyguard if you're going to go against the way markets are going and write on this site!

The Dodger

2008 Nov 16 02:58 PM

[Jim Hawthorne:]

Dear Jason,
I'm sure that there are special places in both investing heaven and investing hell for unbridled optimists such as yourself! In a period when pessimism has not only finally become respectable, but has become the norm, you still manage to search for the half-full glass hiding amongst the sea of empties.
However; none of the bailouts will work; Paulson is looking more and more like a fool; the consumer will do no better at saving our collective ass than will governments; massive hedge fund redemptions will spawn massive selling at every opportune rally from now til December 31st, and maybe beyond.
Nevertheless, I can still applaud your lonely cheerleading. I assume your patron Saint goes by the name of Jude. If our paths ever cross, I will buy you a beer, just for your efforts.
Hope is a lousy investment strategy...

2008 Nov 16 03:34 PM

[Reinko:]

To ArtFulDodger:

You write, quote:

"This site is filled with market followers. When one is going down, they think it's never going to stop. When up, the opposite."

But on this website there were a long long time good looking females commenting upon the strength of the US dollar.

These chicks are gone but dollar strength is still there....

I would like the chicks back, where have they gone???

2008 Nov 16 05:52 PM