Expect Further Rise in the S&P 500

Many Bears continue to contend that this current market is much overvalued and a return to the March lows of 2009 is inevitable. Even the more moderate of the Bears think 800 is a good possibility in conjunction with a double dip recession, or "W" economy.

I challenge these bears to make their case in a non-emotional and statistical fashion. What I hear from these strategists is a "gut feel" response with no statistical backing. They contend that, of course, the current fiscal and monetary stimulus will wear off and the economy will relapse. The extrapolate the past year of weak consumer demand infinitely into the future (the worst mistake any investor can make is extrapolating the past to the future).

So I will challenge such strategists with data. Here is the exact Money Market fund data from the ICI which keeps track of this for the government. Go to www.ICI.org for the data to see for yourself. I also go to FRED, the Federal Reserve repository for statistical data, but the utilize ICI data for these series anyway. So, might as well go straight to the source.

• March 4 = $3.903T
• August 5 = $3.606T

So, in the move from SP500 = 666 to 1000, the money market funds have only gone down by $300B, or 10% of total available “dry powder”. This it does not sound like wild bullishness to me and shows that to the contrary, much money remains on the sidelines to be invested. This money is earning less than 1% right now, so is a very poor long term investment and must go somewhere once panic subsides. Will it go to bonds with the prospect of higher inflation on the horizon, which hurts bond returns? Or will it go to equities? It sure can’t all go to gold, which has a total world capitalization of only about $300B.

Another measure from ICI is the relationship between stock mutual funds and money market funds.

In December 08 stock market funds were $3.704T and money market was $3.341T, or almost a 1:1 relationship.

By June 09 this had changed to $4.010T for stock and $3.652T in MM (which were still higher than in Dec 08 showing a net inflow to funds of all kinds). But it is still no where near the historic relationship between stock and MM of 3:1. So, there is a long way to go before the market even gets back to a “neutral” position in respect to available funds. The Bears apparently don’t want to pay attention to such common sense analysis but instead are still responding to their own fear.

I don’t have the exact relationship between stocks and MM as of Jan 2007, near the top. It would be very interesting to observe. But we can estimate it. I do have the MM funds for Jan 2007. They were right at $2T. We can estimate the total mutual funds holdings by just extrapolating the June data of $4T by the ratio to the market top for the SP500 (1550) vs. the SP500 in June (900). That ratio is 58%. So, using extrapolation, we get to a total mutual fund stock holding of $6.9T. This is likely pretty close to the peak, and was therefore better than a 3:1 ratio of stock to MM (more like 3.5:1) at that point.

So, let’s say we get to 2:1 given the lousy economic outlook according to many of these Bears. That would put the stock holdings near $5T and the MM near $2.5T, still more MM than the peak in 2007 (when MM was minimal as a percentage), even considering that more money has come into the investment markets in the past 2.5 years. By this approach, we can guess that the market could get to 1200 SP500 without too much trouble, even in a slow growth economic outcome with persistently high unemployment.

Repeat: a return to SP500 of below 800 is extremely unlikely and a higher likelihood is a slower further rise in the SP500 with occasional consolidations.

Disclosure: No Positions

Comments

[Prudent Man...:]

Thanks for telling me something the executives of the 500 companies of the S & P 500 cannot: the future value of their stocks.

Certainty in an uncertain world is egomania or insanity. That little Beagle, whose picture is above, has more sense than that let alone put your ignorance and hubris in print.

Aug 10 04:24 PM

[enigmaman:]

Remember the words of Mark Twain " If a cat sits on a hot stove it wont sit on another hot stove again, but it wont sit on a cold stove either because it has over learned from its bad experience"
To think consumers will jump back into the market as they have before is foolish, as far as the 1% return on the MM, maybe they feel like half a loaf is better then none. Read the Metlife study of the American dream (survey), will open your eyes to what the new normal means to Americans.

I am really amazed at how many people believe things will just go back to NORMAL, like 1999 tech bubble, 2007 Housing bubble, 2008 market and economic crash never happened. After 10 years of 0% market gain, mental anquish and frustration, lets jump in with both feet because that crash happened sop long ago March 2009, right! Since 70% of our GDP depends on consumers I would think knowing their mental state of mind would be important, but thats just me

Aug 10 04:44 PM

[j-dub:]

Please someone explain to this gentleman that the run up has been because the governemt is funneling money through intermediaries such as GS to prop up the market.

"So, in the move from SP500 = 666 to 1000, the money market funds have only gone down by $300B, or 10% of total available “dry powder.
This it does not sound like wild bullishness to me and shows that to the contrary, much money remains on the sidelines to be invested"

Right, no one is buying stocks because no one believes the hype.
How many kicks in one's face do you need before you get up and leave the room? This author clearly has something invested in getting people back into the stock market. Anyone that is telling people that the water is fine deserves to be thrown in head first.

Anyone here that despises people that are pretending that 2008 did not happen, please take one step foward.

NOT SO FAST, MR. MCMORRIS

Aug 10 04:55 PM

[WhoisJohnGalt:]

So the bleeding unemployment rate (let's not forget, it's "less bad" but still just plain bad) is not worrisome? And the mounting government debt? And the ENTIRE season of quarter earnings serving as a rally springboard when top line revenue has fallen by precipitous amounts? Point is....where's the growth? Other than greenbacks, where are your numbers for that? And if a lot of money is on the sidelines, especially the institutions, doesn't that raise a red flag that they're holding off for a reason? You miss one rally, wait for the next correction. And your correlation contradicts your bashing of the quants.

I'm sorry, but my "gut" feels sick just listing that sliver of bad news. You wanna talk about emotion? Your greed. And next the market's uncertainty.

I'm not a bear to purely profit off this stuff, I'm saying it so other people can get off this crazy train.

Aug 10 05:59 PM

[dhansen548:]

The market has been going up since March in the teeth of all the bearishness. People with money to buy have the fantasy that the economy is getting better. How much money have the bears lost out on due to excessive gloominess?
I'll go along for the ride, but my own fantasy----and both bulls and bears are in fantasy-land right now---is that the market will go down a bunch, maybe later this year, more likely early next year.
But my job is to follow the market, not to tell it what it ought to be doing.

Aug 10 07:05 PM

[steve west:]

this guy is a wanna be economist who does not know what he is talking about. Money on the sidelines ( like he knows) does not mean money in the markets.
from his profile it sounds like he is a rank amature

Aug 10 07:38 PM

[tradeking13:]

So what happened to that $300bln? Did it disappear? Will it reappear when people sell? No. A stock trade (in a secondary market) has two parties: a buyer and a seller. When Party A uses MMF proceeds to buy stock from Party B, they make an exchange. After the trade, party A now is holding stock and Party B has funds held in an MMF. So, was there a withdrawl from MMFs in aggregate? No. Each party is holding each others previous position. This is why it is called trading.

The $300bln was most likely drawn down to buy shares in the multitude of secondary offerings that were done this spring/summer, to buy shares in IPOs, to buy the massive amount of new corporate bonds and Treasuries issued, among other things.

Specious arguments like these (cash on the sidelines, stocks cheap according to the IBES/Fed model, etc.) usually come toward the end of rallies when the fundamentals no longer justify the valuation.

www.hussman.net/wmc/wm...
www.hedgefolios.com/re...

Aug 10 09:56 PM

[Ryu Mei Co:]

Oh Brian! Brian! Brian! .... You can use whatever relationship and statistical numbers to argue your points, but the truth of the matter is that nobody wants to put 100% of their cash into this crazy market.

Moreover, let me give you an idea where to put that large amount of money. China, India, Brazil, Indonesia, Taiwan, Korea any emerging markets!!!!

You think this 3Trillion money will be going into Bonds, Gold, or US equity alone. Dream on! I am a Japanese businessman and I have a huge MM account in US given by my parents and guess what? I am investing onto other countries other than US.

Aug 10 10:12 PM

[Billw77:]

This man shows the analytical skills of a fifth grader at best. Attitudes like his are what got us in this mess in the first place. Most of us are retail investors. Only real traders have any business in this market. A little reading of John Hussman and a few others should confirm that point. And most of the traders are hedging to make sure that they don"t get burned when this market makes the U-turn that so many have been expecting.

Aug 10 10:24 PM

[Roger Knights:]

There have been innumerable articles on the SA site giving the details of the tremendously negative fundamentals and potential black swans that exist. The mountain of debt is going to interact with numerous wobbly dominoes to set off a second down-leg soon.

As for the money on the sidelines: my guess is that most of it will stay there until the dust settles. There's no reason it has be seek a better yield, when the risks of doing so are so great.

Aug 10 10:25 PM

[Roger Knights:]

PS: Insider selling is outweighing insider buying by an enormous margin (maybe unprecedented?).

Aug 10 10:26 PM

[Brian McMorris:]

Thank you all for making my point. There was not one positive response to my bullish case. As a contrarian, I need you all to remain as bearish and negative as you are. Thank you for confirming my suspicions.

Steve West: a special pointer for you. I DO know exactly what the MMF is at a point in time. I looked it up on the ICI website which is where everyone, including the Fed, goes for the data. I gave you the link so you too can be an informed "rank amateur" (and what really qualifies anyone to be a professional? You think professional economists are any better than this "rank amateur" at guessing the future? I can throw darts with the best of them.

Aug 10 11:49 PM

[PearlCreek:]

Looks like Brian stirred up a hornets nest. The great Michael Steinhart today on CNBC made an extraordinary proclamation that he knows nobody that is long term bullish on the U.S.

That is an incredible statement from one of the great money managers of all time given what surely must be his vast social and professional investment network.

The current bearish chatter reminds me of the 1999-2000 bullish chatter. The same bluster, the overwhelming proclamations of certainty, the same main thread of "things are different", the same main street/retail group think, and the parallels to clinging to a few themes that if repeated enough will most certainly come to fruition.

If you are wildly bearish, you have good reason to be and all the ammunition you need. The arguments are clear, concise, and logical. When things are that clear as the bear case is now, my warning lights go off. Sorry bears, but the "walk over and pick money up in the corner" has already been made. If you didn't profit wildly from last summer to March, you are a salmon swimming upstream.

I am not wildly bullish, but if you haven't flipped the trading switch in your brain to at least allow the possibility of further gains, you are not doing your job as a trader or an investor.

Aug 11 12:20 AM

[appa:]

Thx Brian for providing a different point of view. Much appreciated.

appa

Aug 11 03:14 AM

[Jared McMorris:]

Thanks for the post dad, the maturity level of the people who responded absolutely astonishes me. Who knew so many adults could act like little children. "Oh no! He doesn't believe the same thing we believe, we better attack him on a personal level since we aren't informed enough to make a legitimate rebuttal!"

Aug 11 10:21 AM

[Eduard Fischer:]

Although there were a number of published models out there before the economic crisis of 2008 showing why it was inevitable, I have not seen a single model showing how this vaunted economic recovery is supposed to take place considering the present state of consumer and government debt. The crisis was caused by a credit (not real estate) bubble, which has not in any way been realistically addressed. The stimulus package and tax breaks have extended consumer credit further by sifting more of the new debt to the US government. There seems to be no realistic plan in place for even stabilizing the accrual of this debt let alone paying it down.

To begin to pay down consumer and government debt the US would have to enter another cycle of sustained economic expansion, which is not possible given world market completion. America cannot be completive on the world market simply because there are not enough Americans employed making things. Most Chinese workers, for instance, are directly engaged in production whereas only a small percentage of US workers are. The vast majority are employed in “services,” that is in simply moving stuff or money around, or in a Willy Loman style of hustling themselves. Arthur Miller’s character in “Death of a Salesman,” may well represent the state of the whole country today.

As for all the money “sitting on the sidelines”: the funds flowing into US treasuries is desperately needed every day to finance the enormous US government deficit that is needed to sustain the system. If that money starts to flow elsewhere, then the recent financial crisis will turn out to be a mere prelude to a real meltdown.

Here’s a quote form Miller’s famous 1949 play: “He's a man way out there in the blue, riding on a smile and a shoeshine. And when they start not smiling back — that's an earthquake. and then you get yourself a couple of spots on your hat, and you're finished. Nobody dast blame this man. A salesman is got to dream, boy. It comes with the territory."

Just remember how much of US debt is being financed by foreigners and what may happen if they stop smiling back. In the meantime dream on if you like.

Aug 11 01:15 PM

[David Van K...:]

Most data suggest that the "average consumer" (whoever that is) has become more conservative in day-to-day spending. This is demonstrated by lagging store sales, deleveraging of personal credit, higher savings rate, falling credit availability, troubled job market, etc. Thus it stands to reason that these same individuals have become more risk-averse in their investments too. So it's not surprising to see more $$ directed toward safe-haven money-market accounts, high-grade bonds, mattresses, and the like than toward riskier assets like stocks. There is money available to invest, but the will to put it into risky investments is low. People are focused more on return OF their money than return ON their money right now.

There's no telling how long these trends will last, although my gut tells me they are closely tied to the job market--whether people have jobs, and among those that do, how secure they feel their job is. We're somewhere around the tipping point now: The recession is probably close to being technically over, but that is not yet reflected in the job market (employment is still declining, but at a slowing rate). The question is whether the stock market can "bridge the gap" between the technical end of the recession and the beginning of expanding employment. If this becomes a "jobless recovery" for more than a few months, the stock market rally will probably fizzle out.

Aug 11 04:12 PM

[Per:]

Well, from a technical perspective there is no reason to be bullish again until we are breaking through the established resistance levels across the indices. Once we have another breakout - as with 875, 950 et cetera - there is an argument to go long.

It's all about timeframes. My take is that we'll see a pullback to 950 and then another try at 1,000. Nothing goes straight down, not even during last fall. But analyzing the bigger picture the money is definitely on the bears.


On Aug 11 12:20 AM PearlCreek wrote:

> Looks like Brian stirred up a hornets nest. The great Michael Steinhart
> today on CNBC made an extraordinary proclamation that he knows nobody
> that is long term bullish on the U.S.
>
> That is an incredible statement from one of the great money managers
> of all time given what surely must be his vast social and professional
> investment network.
>
> The current bearish chatter reminds me of the 1999-2000 bullish chatter.
> The same bluster, the overwhelming proclamations of certainty, the
> same main thread of "things are different", the same main street/retail
> group think, and the parallels to clinging to a few themes that if
> repeated enough will most certainly come to fruition.
>
> If you are wildly bearish, you have good reason to be and all the
> ammunition you need. The arguments are clear, concise, and logical.
> When things are that clear as the bear case is now, my warning lights
> go off. Sorry bears, but the "walk over and pick money up in the
> corner" has already been made. If you didn't profit wildly from
> last summer to March, you are a salmon swimming upstream.
>
> I am not wildly bullish, but if you haven't flipped the trading switch
> in your brain to at least allow the possibility of further gains,
> you are not doing your job as a trader or an investor.

Aug 11 08:22 PM

[Brian McMorris:]

Agreed David. Your points are well made. But I am in the camp who think the massive stimulus (not just the $700B stimulus, which honestly has been botched by Congressional bickering), but more subtle Quantitative Easing and actions in the Fed to beef up the banking systems balance sheets. Also, China is doing everything it can to help out by stimulating its own consumers so that it needs the West less to keep its factories humming. With a globally coordinated banking effort, I think it is going to work out. Looking back, this unprecedented global cooperation will receive most of the credit. It is really an historic event.


On Aug 11 04:12 PM David Van Knapp wrote:

> Most data suggest that the "average consumer" (whoever that is) has
> become more conservative in day-to-day spending. This is demonstrated
> by lagging store sales, deleveraging of personal credit, higher savings
> rate, falling credit availability, troubled job market, etc. Thus
> it stands to reason that these same individuals have become more
> risk-averse in their investments too. So it's not surprising to see
> more $$ directed toward safe-haven money-market accounts, high-grade
> bonds, mattresses, and the like than toward riskier assets like stocks.
> There is money available to invest, but the will to put it into risky
> investments is low. People are focused more on return OF their money
> than return ON their money right now.
>
> There's no telling how long these trends will last, although my gut
> tells me they are closely tied to the job market--whether people
> have jobs, and among those that do, how secure they feel their job
> is. We're somewhere around the tipping point now: The recession is
> probably close to being technically over, but that is not yet reflected
> in the job market (employment is still declining, but at a slowing
> rate). The question is whether the stock market can "bridge the gap"
> between the technical end of the recession and the beginning of expanding
> employment. If this becomes a "jobless recovery" for more than a
> few months, the stock market rally will probably fizzle out.

Aug 13 12:03 AM

[Brian McMorris:]

Hey Roger....Two months later and no "2nd leg down". Getting worried that "soon" may never come?


On Aug 10 10:25 PM Roger Knights wrote:

> There have been innumerable articles on the SA site giving the details
> of the tremendously negative fundamentals and potential black swans
> that exist. The mountain of debt is going to interact with numerous
> wobbly dominoes to set off a second down-leg soon.
>
> As for the money on the sidelines: my guess is that most of it will
> stay there until the dust settles. There's no reason it has be seek
> a better yield, when the risks of doing so are so great.

Oct 21 12:35 AM