The March rally in the stock market has people talking, and asking questions, such as: Was that a bottom?
For the moment, the answer is “yes.” Deciding if the answer holds is debatable. We’re skeptical largely because the rally this month has drawn power primarily from a new round of hope that Washington’s various experiments to right the economy will finally hit pay dirt. Perhaps, but it’s not the stuff that powers sustainable rallies, much less secular bull markets. We're closer to that point than we were 3 months ago, of course. But uncertainty still dominates.
The latest chatter may put a floor on equity prices, and for the moment that's what we're looking for, although it'll only be obvious in hindsight. Clearly, the government is integral in the healing process. But expecting the latest press release from the Treasury or the Fed to unleash something more substantial than a bounce is probably expecting too much at this point.
Nonetheless, it’s tempting to look at the trend in recent weeks and draw an optimistic conclusion. As the chart below shows, March has been kind to owners of equity. After taking another drubbing in February, investors were primed for anything that even remotely looked like good news.
And more of it appears to be coming in today’s news cycle. The latest from the Treasury is yet another freshly hatched plan to subsidize private purchases of the toxic securities that are weighing on the banking industry’s balance sheets. The size of the plan is a tidy $1 trillion, which is to say it’s sizable. Asian markets responded positively to the news and as we write the U.S. stock index futures are up ahead of the opening bell on Wall Street. It’s not over till it’s over, but with just over a week to go, it’s looking as if the S&P 500 may post a modest gain for this month… maybe.
Treasury bonds, meanwhile, received another round of support last week when the Fed announced it planned on buying government debt directly in a bid to lower interest rates. The announcement alone was enough to shave a massive 50 basis points off the yield for benchmark 10-year Treasury Note in a single trading session. Treasury prices, in short, exploded higher.
Suffice to say, it’s been a profitable run for stocks and bonds of late, and the crowd’s keen on expecting more.
Don’t misunderstand: The government efforts at cleaning up the mess are critical. But the government’s engineering of prices, even for fundamentally sound reasons, has limits. Since the implosion of Bear Stearns more than a year ago, Washington has been stepping into the breach and (sometimes) propping up the market, only to watch the true market sentiment return. Prices, in other words, keep falling.
At some point the declines will cease and desist. For all we know, that point may have come earlier this month. But even in these extraordinary times, finding equilibrium isn’t solely a function of government announcements, or so history reminds. Ultimately, the crowd has to come to terms with the reality that awaits, in which case prices will fully and fairly reflect the future estimate of what’s coming.
The enlightenment isn’t likely to come in a press briefing at the Treasury. Yes, the state's efforts will have an impact on the economic fundamentals, but assessing the degree of the impact takes time. And before we can run, we have to prove that we can stop falling. That tends to be a tedious and unexciting process, revealed over time.
The bottom will be obvious in hindsight. In real time, almost everyone will be clueless. The price of risk looks a lot more reasonable these days, and so strategic-minded investors should be increasing exposure to various betas, albeit slowly. Expecting it to pay off by next month, or even next year, however, is inherently speculative.