Since most major markets are closed for Good Friday, today marks the end of the first quarter of 2013 for the stock market performance derby. As I write, the Dow just set another all-time high Tuesday and is up over 10% for the quarter, while the S&P 500 is flirting with new highs. Not bad. But if you read the major press outlets each day, you might wonder how any market gains are possible. Today's biggest headlines have been mostly about government squabbles within the U.S. and a series of banking crises in Europe.
Here's where history comes to our rescue. If you look at some headlines from 1973, for instance, some of yesterday's biggest concerns look like jokes today. Forty years ago, our biggest fear was a coming Ice Age, not global warming; we feared global starvation, not obesity; we feared energy scarcity ("peak oil"), not an energy glut; overpopulation, not a birth dearth. In 1973, some of men wore long hair, wispy beards, double-knit bell-bottoms, and tie-dyed shirts. Like our old photos, our 1973 fears look silly today.
Since we are about to enjoy a three-day market break, I'd like to help inoculate you against some of the nonsense you might hear again Monday morning. These aren't exactly April fool's jokes, but I'll bet you can look at these big market concerns with something like an amused chuckle in a year or two.
April Fool's Joke #1: Cyprus Will Bring Down the World
"The Cyprus event may later, in the history books, be seen as the catalyst of the fall of a century-long Ponzi scheme. This could rank in line with the shot in Sarajevo as the start of World War I, or the collapse of Kreditanstalt in 1931 as the start of the Great Depression."
-- Egon von Greyerz, founder and managing partner, Matterhorn Asset Management AG, Switzerland
Here's an alternative prediction: This quote may, in future history books, embarrass its author.
This statement is dramatic, but it's not that far above the level of heated rhetoric we hear almost every day about Cyprus. There's something about banks on European islands - Iceland, then Ireland, then the Greek Isles, now Cyprus - that generates purple prose about the end of the euro. Greece has whipsawed our stock market for three years now. Happily, investors have learned from this Greek tragedy that big banks in the Mediterranean are not capable of derailing global growth. The U.S. stock market quickly recovered from its initial shock over the "Cyprus event" and just set another all-time high on the Dow last Tuesday.
Let's get real. Cyprus accounts for 0.2% of the eurozone's GDP and 0.25% of its people. It is a relatively new member of the eurozone (since 2008). No doubt we'll see a series of breathless bailout plans over the next few months, but I would love to see some big euro-crat step back from all this nonsense and ask: "Why can't this small island become a trial case for what might happen if a nation leaves the eurozone?"
Why can't nations divorce amicably? Why can't Cyprus or Greece leave the eurozone voluntarily, or be kicked out for not meeting their financial obligations under the various eurozone agreements they all signed? After all, Czechoslovakia split into the Czech Republic and Slovakia 20 years ago: No shots were fired and both nations went on to prosper. Why not let Cyprus become a floating tax shelter for Russian "entrepreneurs," if they wish. Either way, why not let what happens in Cyprus…stay in Cyprus?
April Fool's Joke #2: "Sequestration" Will Bring the Economy to a Halt
How we love sequestering
Where no pests are pestering
-- Rodgers & Hart, "Mountain Greenery" (1926)
The forced spending cuts that began March 1, were supposed to bring down the U.S. economy and send tens of thousands of important and dedicated federal employees home on forced furloughs. Planes would fall from the sky, and TSA body-search lines would stretch into the parking lots in major airports. The Grinches in government even threatened to kill this weekend's Easter egg hunt and White House tours.
Alas, the perma-bears on "sequester watch" are probably disappointed to see that nearly all the major U.S. economic statistics have become stronger throughout March. The Federal Reserve's Beige Book surveys showed gains in manufacturing activity in 10 of the Fed's 12 districts. New unemployment filings reached a five-year low in March. GDP growth this quarter and next is expected to top 2%, with full-year growth expected to reach 2.3%, well above the anemic near-zero growth in the fourth-quarter of 2012.
Last week, the Conference Board said that its index of Leading Economic Indicators [LEI] rose by 0.5% last month, with 8 of the 10 LEI components rising. Meanwhile, investors are feeling richer, since the S&P 500 is up 24% since the start of 2012 and median home prices are up 11.6% in the past 12 months.
As for those pesky sequestering tactics, if the government can't afford to pay airport cops and air-traffic controllers, then privatize those services. Nobody is more concerned about airline safety than the airlines, especially the pilots and crew aboard the planes, so let the airlines control air traffic and body screening.
In a broader sense, government officials need to use wisdom and good judgment to find necessary budget cuts and not act like children, cutting services most valuable to the public to score petty political points.
April Fool's Joke #3: Stocks Will Go Down Because… They're Too Darn High
"Trees Don't Grow to the Sky"
- a Confucian saying attributed to Louis Rukeyser
If the Doomsday press runs out of external threats - like small islands and cost-cutting games - then they will point to the fact that "what goes up must come down," or, in a phrase that is repeated so often it has lost all meaning - "trees don't grow to the sky." Stocks aren't trees, but let's expand that metaphor a bit:
I am surrounded by five acres of trees. Our fruit trees are like dividend-paying stocks, bearing fruit each year, while our cedars and Douglas firs grow lots of firewood and still keep throwing off new saplings.
Trees don't grow infinitely higher, but forests grow wider, through expansion. The bears can't see the growing width (and board-feet yield) of the forest if they fixate on the finite elevation of a single tree.
If individual stocks are trees, then single companies can create offspring (like the Baby Bells), or they can merge. Others can go private. An occasional crash, like a forest fire, can be devastating, but it also creates far more rapid growth rates from the ashes. And that brings up a pleasant problem we face in today's market. Through corporate buybacks and mergers, we're beginning to see a shortage of available shares.
The Stock Market is Shrinking…Stocks are Disappearing
USA Today reported last week that "the stock market is shrinking. The number of companies that individual investors can buy shares in is in a breathtaking decline, continuing a fall that's been years in the making but that's accelerated this year with its record-breaking start to takeovers, mergers and buyouts."
The Wilshire 5000 can no longer live up to its name, since there are only 3,678 companies that qualify for that index (i.e., trading on an open exchange), down over 50% from the peak (7,562) in July 1998.
In just the last quarter, Dell, US Airways, Heinz*, and OfficeMax - plus an army of smaller saplings - have said they plan to leave the market, go private, or merge. USA Today said, "Now that companies can borrow so cheaply, they can afford to buy rivals and get instant gains." In other words, big corporations aren't buying the "trees don't grow to the sky" theory. Instead, they're buying up sections of the forest.
Investing is a matter of supply and demand, like any other market. If the supply of shares falls while the demand for shares is rising (due to the low returns and increasing risk of alternative investments), then investors will have to bid those fewer shares up higher. And if companies buy more of their own shares, earnings-per-share will rise (even if earnings themselves are relatively flat), since there are fewer shares.
It's no wonder that Morgan Stanley recently raised its 2013 target for the S&P 500 from 1434 to 1600, Goldman Sachs raised its 2013 target from 1575 to 1625, and Deutsche Bank raised its 2013 target from 1600 to 1625. These major investment advisory firms are applying supply and demand to share prices.
P.S. Here's another reason to be bullish short term. Rather than being the "cruelest month," April is historically the best month in recent market history, rising an average 2.7% in the last decade. The Dow has risen in seven straight Aprils, averaging +3.6% since 2006. So, thus armed…have a nice weekend.
Disclosure: I am long HNZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.