Monday, November 16, 2009
The Coming Perfect Storm
The Coming Perfect Storm
The markets are setting up for a confluence of events that may make 2010 the best year in US market history. In order to achieve this lofty accomplishment it will take all factors working in sync perfectly. It appears that is more than slightly possible. So how do I come to such an outlandish conclusion given the markets already unbelievable 60% gain from the March 09 lows? I will walk you through that logic a step at a time.
Step 1---- Unemployment pauses and employment gains begin. This scenario is a given because of recent productivity gains. Workers today are producing at levels never seen in history and that can only continue for so long. As the economy stabilizes employers will be forced to fill vacancies in their payrolls.
Step 2-----Consumers rise from the dead. This is already starting to happen in a variety of areas not the least of which is in the aspirational consumer category. When the financial crisis hit everyone stopped spending because no one was sure they would have a job in the next few months. For those who did not lose their job the past year has seen saving become the new cool. But as productivity gains have shown, workers are working harder and longer than ever before. As the unemployment rate pauses and then begins to fall workers will begin to reward themselves for a year of hard work, self control, and creating a savings safety net. Knowing that their jobs are no longer in danger will cause a consumer rebound stronger and faster than anyone has imagined.
Step 3-----4Q09 Earnings season blows off the doors due to easy comparisons. Just as the consumer begins to release pent up demand YOY comparisons will become increasingly easy. 4Q08 was a period of time that the consumer essentially went into hibernation. Beginning with the 4q09 earnings reports companies will be comparing their earnings to an economy in freefall. This should lead to earnings beats, upward revisions, and other events which investors adore and are willing to pay for.
Although market advances, year to date and from the March lows, are enough to cause caution too much caution may lead one to miss one of the greatest bull runs in history. Putting the market into historical context the SP 500 still need to gain 15% to get back to Sept 08 levels. From there it will need to add another 12% to get to end of year 2007 levels, and another 10% gain is needed from there to get to the all time closing high on 10-31-2007. Overall the SP 500 needs to gain 40% from current levels to get back to the Oct 2007 highs. That is a long way off. The point being that the markets overreaction to the downside has caused what is a strong but not unreasonable market recovery to appear completely overdone.
As the market moves forward we should expect difficulty moving past each of the milestones noted (Sept 08, EOY 07, Oct 07) however the overall market direction should be bullish.
The markets are setting up for a confluence of events that may make 2010 the best year in US market history. In order to achieve this lofty accomplishment it will take all factors working in sync perfectly. It appears that is more than slightly possible. So how do I come to such an outlandish conclusion given the markets already unbelievable 60% gain from the March 09 lows? I will walk you through that logic a step at a time.
Step 1---- Unemployment pauses and employment gains begin. This scenario is a given because of recent productivity gains. Workers today are producing at levels never seen in history and that can only continue for so long. As the economy stabilizes employers will be forced to fill vacancies in their payrolls.
Step 2-----Consumers rise from the dead. This is already starting to happen in a variety of areas not the least of which is in the aspirational consumer category. When the financial crisis hit everyone stopped spending because no one was sure they would have a job in the next few months. For those who did not lose their job the past year has seen saving become the new cool. But as productivity gains have shown, workers are working harder and longer than ever before. As the unemployment rate pauses and then begins to fall workers will begin to reward themselves for a year of hard work, self control, and creating a savings safety net. Knowing that their jobs are no longer in danger will cause a consumer rebound stronger and faster than anyone has imagined.
Step 3-----4Q09 Earnings season blows off the doors due to easy comparisons. Just as the consumer begins to release pent up demand YOY comparisons will become increasingly easy. 4Q08 was a period of time that the consumer essentially went into hibernation. Beginning with the 4q09 earnings reports companies will be comparing their earnings to an economy in freefall. This should lead to earnings beats, upward revisions, and other events which investors adore and are willing to pay for.
Although market advances, year to date and from the March lows, are enough to cause caution too much caution may lead one to miss one of the greatest bull runs in history. Putting the market into historical context the SP 500 still need to gain 15% to get back to Sept 08 levels. From there it will need to add another 12% to get to end of year 2007 levels, and another 10% gain is needed from there to get to the all time closing high on 10-31-2007. Overall the SP 500 needs to gain 40% from current levels to get back to the Oct 2007 highs. That is a long way off. The point being that the markets overreaction to the downside has caused what is a strong but not unreasonable market recovery to appear completely overdone.
As the market moves forward we should expect difficulty moving past each of the milestones noted (Sept 08, EOY 07, Oct 07) however the overall market direction should be bullish.
