Thursday, January 17, 2013

Charting the recovery


I first created and posted this chart back in November 2008. Since then I've updated it numerous times, beginning here and here, where I noted (June 29, 2009) that "I think a recovery is underway, and it is being fueled by a restoration of confidence and the return of liquidity to the markets." That later turned out to be almost the exact date that marked the end of the recession and the beginning of the recovery. As the chart suggested at the time, the decline of fear and the restoration of confidence has indeed been one of the driving forces of the economy's recovery and the market's rally.

It's been quite gratifying (and rewarding) to see how this has played out over the years.

Is the chart now suggesting that we've seen the end of the rally? I don't think so. I think it suggests that fear and uncertainty are no longer going to be playing a very important role. Economic fundamentals and fiscal and monetary policy actions will be the dominant factors going forward.

18 comments:

marcusbalbus said...

wow. you rock

Gloeschi said...

But for months and months you preached fear and pessimism was at extreme level. All gone overnight?

sgt.red.blue.red said...

Yes, the veritable 'wall of worry' we climb....

We're not even back to where we were six or seven years ago. Still a long ways to go.

Benjamin said...

My only worry is we do not see a lot of management LBO action, even with interest rates at near zero.

This does not suggest a bear market, but suggest management thinks these companies are fully valued....

BTW, every time a management does an LBO, they should have done a re-cap, and left shareholders owning the company.

William said...

sgt.red.blue.red said..."We're not even back to where we were six or seven years ago. Still a long ways to go."

But we are back to where we were in early 2008 - 5 years ago and above where we were 7 years ago. The S&P 500 hit a peak in October of 2007 at slightly over 1,560. So as of today's close, it is 5.1% from the 1560 all time high.

Is that a "long ways" considering that the S&P 500 bottomed at 676 - a twelve year low - on March 9th 2009? ? Give credit where credit is due!

http://money.cnn.com/2009/03/09/markets/markets_newyork/index.htm

Joseph Constable said...

Prices of oil, gold, commodities and CPI have trended towards stability for a couple years. The markets love that and the VIX reflects it. Low volatility gets the institutional investors and professional money managers to rotate from bonds to stocks. The market will love slowly rising interest rates. Interest rates bottomed last summer.

But my finger hovers above the sell button. That darn Apple Computer can change the bullish short term technical picture of the market.

marcusbalbus said...

bet you won't pay any attention to the misses on the michigan survey. nope, not unless you can cheer.

Joseph Constable said...

I think the market is nuts. But don't fight the tape and don't fight the Fed.

William said...

Jan 18th ECRI Weekly Leading Indicator Rises

A measure of future U.S. economic growth rose in the latest week to its highest since April 2011, while the annualized growth rate also strengthened, a research group said on Friday.

The Economic Cycle Research Institute said its Weekly Leading Index rose to 130.4 in the week ended Jan. 11 from a revised 128.1 the previous week. The index's annualized growth rate improved to 6.1 percent, its highest since October, from 5.0 percent a week earlier.

http://www.businesscycle.com/

steve said...

the market as measured by VFINX a surrogate for the S&P 500 is trading at all time highs:

http://quote.morningstar.com/fund/f.aspx?t=vfinx

Dr William J McKibbin said...

I am delighted to see optimism in the stock market -- however, I do not believe that a stock market recovery is related to an economic recovery in the US -- in fact, I believe that people without world-class skills and/or means are in for harder and harder times that will extend through the balance of the 21st century -- but yes, rich people with means and income are wearing shades right now -- the rich are getting richer and that trend will continue for the remainder of the century -- everyone else should prepare for a constantly declining standard of living in America.

John said...

Scott,

Would like to say 'thank you'for your consistently good market judgement over the past 2-3 years. I have found them to be most helpful, particularly during the Euro fear-filled weeks of 2010 and 2011. Cherry picking when fear was high resulted in some terrific investments. Thanks again for your clear headed insights.

Scott Grannis said...

Thank you John!

Rick said...

A declining VIX also means no market optimism for significant future growth. The index reflects volatility - not fear. Volatility can also be positive. The market rally from 1995 to 2000 was accompanied by a rising VIX. Although the recent fear-based volatility has ended, the low reading does not mean that the market thinks the future is rosy.

Scott Grannis said...

The Vix says little or nothing about optimism. It's more about fear and uncertainty. A low Vix and a low PE means that the market is relatively comfortable with the idea that the economy is going to be lackluster for the foreseeable future. In a sense, the market now is reasonably certain that the future will be unexciting.

Bill said...

Your friend at Calculated Risk seems to think we'll have nice growth over the next few years as the housing market heals and that as long as the country doesn't adopt extreme austerity, the markets should do fine. What do you think?

Scott Grannis said...

I stand by my predictions for this year:

http://scottgrannis.blogspot.com/2013/01/predictions-for-2013.html

I think the economy is likely to grow, and to grow by more than the market expects. This should be good for equity markets. But growth will not be very strong. Housing is a real plus, but fiscal policy is still a big drag: higher marginal tax rates on upper income earners and very high tax rates on corporations.

Maybe we get 2-3% real growth this year.

sgt.red.blue.red said...

William, as of January 24, 2013 close, for instance, the DJIA is 13.8% below its (inflation adjusted) 2000 high, and 11.9% below its 2007 high.

DJIA Off Its All-Time High in Inflation Adjusted Dollars