I don’t know about you, but it feels like it’s been three years since I’ve been able to breathe easy in the stock market. The plague of panic goes a little something like this: systematic bank failure, billions in writedowns, threat of economic depression, euro collapse, sovereign debt contagion, health care reform, financial reform, tax increases, double dip, tight lending, credit contraction, de-leveraging, and even a bout of swine flu mixed in. Can’t we have a few months without the fear of crisis keeping us up at night? Don’t we deserve to have a few good market months through year end? I think we do and here’s why:
1- In the grand scheme of things, we will look back at mid year 2010 and view it as a brief pause in the cyclical recovery. A pause that compelled the U.S. to fix its anti-growth government policy, a pause that compelled the Eurozone to pass austerity measures, and a pause that established a new baseline from which the economy could resume its upward trajectory. I really believe that the flat market performance of August was hugely bullish for the rest of the year as it showed us the bad news is already priced in. If the market didn’t go down in that environment of low volume, bad economic news, terrible housing news, and lackluster leadership from stocks like Apple (AAPL) and Bank of America (BAC); then it is done going down. August action shifted the path of least resistance from the downside to the upside.
2- The market is optimistic about gridlock in Washington. The first two years of President Clinton’s first term were lackluster for the market as it stuck to a tight trading range of Dow 3,300 to 3,800 but once gridlock arrived in November 1994 the market roared from 3,800 to 6,000 over the next two years as Clinton worked with Republicans to balance the budget. History may be on the verge of repeating itself. The uncertainty that results from radical reform by a President, whether that President is Reagan, Clinton, or Obama, is too much for investors to deal with. Wall Street prefers stability out of Washington. It’s time to take Obama’s name off of the financial news pages. Gridlock cannot arrive soon enough.
3- Tech is on fire. Q2 earnings season was stellar and the growth of wireless, 3G, and 4G networks is enabling a tech revolution similar to the transportation revolution in the early 1900‘s. Any time we break down societal barriers of communication on such a massive scale, economic growth is unleashed. As long as tech is leading the market rally, as it is currently doing, investors will trust the action and feed the momentum. Nobody wants to miss out on Apple’s holiday iPad run, nobody wants to miss out on the wave of Netflix (NFLX) subscriber growth, nobody wants to tell their grandkids that they lived during a time of mobile Web explosion and yet they failed to profit from it. No way. Investors want to tell their grandkids that they owned Baidu (BIDU) as the Chinese middle class adopted the Internet, they’ll brag about the rise of tech in decade 2010 as a way to overshadow the guilt of the dot-com bubble ten years earlier. The Internet in your pocket is a game changer that the stock market will respond to as soon as it can breathe for just a moment.
The idea that investors won’t have to fear banks, Europe, housing, or Obama in 2011 should bring a substantial ‘sigh of relief’ rally into year end. Investors haven’t taken a sigh of relief in three years. It’s about time.
Disclosure: Long AAPL, NFLX