I know that setting any number — upper or lower level — is a game that one is bound to lose, and the 1,500 mark for the S&P 500 is only plausible because we’ve been there twice before; thus the risk of looking foolish is quite low. As a matter of fact, the precise high on an intraday basis is 1,563.03 on October 12, 2007 -- and before we get there, we must contend with the 1,440 level reached on May 19, 2008. But the 1,500 mark is not so far-fetched, because it's less than 13% from the current values.
Oh, I get it: Some will say, "You must be one of those who couldn’t see a bubble if it splashed itself across your face." Well, I have contradicting positions: I’m bearish on the U.S. economy and bullish on the stock market. But let’s look at the economic data of the last two weeks, for it was a prime example of a divergence between economics and equity market.
On March 21, the S&P 500 opened at 1,281.65 and by April 1, the index closed at 1,332.41, for a gain of 3.96%. But the economic data wasn’t supportive, to say the least. The most shocking economic news came in the form of housing numbers. We learned that both Existing Home Sales (-9.6%) and New Home Sales (-16.9%) declined considerably, while new home construction is still at about 25% of normal levels, setting the stage for an overall economic slowdown that is not discounted at this juncture. During that week, final GDP numbers showed 3.1% growth, which will become virtually impossible to match going forward.
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Then came data on March 28 showing that Pending Home sales increased 2.1% from the negative reading of -2.8%. January was revised down from 2% to -3.2% and didn’t get much press. Then, on March 29, the S&P/Case Shiller home price index continued the perfect curve pointing south, by dropping 3.1%. Meanwhile, the Conference Board consumer confidence gauge dropped a whopping 8.6 points, or 63.4 vs. 72 the previous month, validating the revised reading of 67.5 by the University of Michigan the previous week.
More data, released March 30, only told us that oil inventories are still rising, along with prices. Gasoline consumption is not a hot topic in terms of volume, and despite a decrease of 2.7 million barrels, inventories are still in the upper limit of the average range. ADP gave us a hint on new jobs created, which is always good news -- but far short of a true recovery.
March 31 found unemployment claims still uninspiring, despite being below 400,000, and factory orders declining a meager 0.1% against a huge increase of 3.3% the previous month -- which was the highest since August 2007. Friday, April 1 brought the much-awaited employment report, informing us that 8.8% is now a sweet number, and an increase of 216,000 jobs was reason enough to celebrate -- although it barely keeps up with layoffs.
But in the midst of the less-than-stellar economic data, the S&P 500 managed to deliver extremely positive returns for the period. The question out there may be, “How much worse can it get?” when it should be, economically speaking, "Will it get any better?"
One potential explanation is that investors are viewing the current condition as the bottom of the cycle and positioning themselves for the recovery – although it is extremely elusive. And that point only goes to the assumption that I know what everyone is thinking. Well, I don’t, and ultimately it is not important, because whatever the reasoning, it always shows in the capital flows – and they are positive. In addition, the other two main asset classes, bonds and real estate, are not delivering the goods, and an influx into equities is the end result.
One often-heard comment is that the market continues to rise on low volume also attracting short sellers in the process because. from an economic viewpoint, there is no justification for the continued equity market rise. That fact alone is positive because not everyone has realized – and probably never will – that economics and markets can move in different directions because economics, with the exception of very few bright minds, is the science of “what is and was,” while markets reflect the perceptions of “what will be,” which may not be true.
It is often said that markets discount the future; that is incorrect. Markets discount “today’s perceptions of the future” -- whether they are right or wrong – and then adjust in a New York minute.
Thus SPDR S&P 500 (SPY) will shoot for $150 and, if you haven’t noticed, the Nasdaq 100 – represented by the PowerShares QQQ (QQQ) — is already at 2,342, which is well above the intraday high of 2,239 reached on October 31, 2007. Of course, the absolute high of 4,816 for the Nasdaq 100 took place during March of 2000 ... and I don’t see how the index will reach that level.
Despite the numbers, the enthusiasm is not visible yet, although small hints have started to show up in news outlets, such as in this article by Reuters:
If retirement saving is a 100-yard dash, take a look down the track. Ionnie McNeill already has you beat. Though she’s just 22 and a senior at Howard University, McNeill has been investing in stocks for more than a decade. She purchased her first shares (Citrix Systems, CTXS) at age nine, and opened her own Roth IRA at 15. Now, at an age when most college kids are perfecting their beer pong and playing clumsy guitar in their dorm rooms, McNeill has assembled a powerful $50,000 portfolio. Feel inadequate yet?
Only when Jay Leno or Oprah start dispensing the same type of talk will I call it a day, before the eventual reversal in capital flows -- and capital could go to cash, the other "asset." As we move forward -- and the public becomes finally convinced that house flipping, even at these prices, is no longer in fashion, while stocks keep moving forth with the media providing constant reminders -- additional capital will flow into equities chasing the usual dream. In addition, foreign capital is attracted to U.S. equities as well, because the perception is that the U.S. will be the first to get back on its feet.
Ultimately, the time will come when the realization will materialize that the perceptions were incorrect and, in my opinion, a long and painful period for equities will rear its ugly head. But if I have to give a timeline, I would anticipate the party to last for another 6-18 months. To those that call that too vague, I say that my lawyer told me that I had a 50/50 chance of winning a case, although he had all the evidence in his hands. My CSI team is still lacking a few clues!
Disclosure: I am long SPY, QQQ.
