Two Days of Losses - Is the Rally Over?
The strong run in the USA stock markets that began on January 1st finally came to an end this past week. For the first time in 2013, the stock markets had back to back days of losses on Wednesday & Thursday which resulted in about a 2% loss for both days. This 2% loss brought out several pundits stating that the most recent market rally had come to an end. Maybe the pundits will be right. However, on Friday the S&P 500 rallied for almost a 1% gain and the markets closed Friday at their highs for the day.
For the week overall, the S&P lost 15 points or about 1% and closed at 1,516.
So far for 2013 the USA markets have gains of around 6%. This is one of the better starts to the year in the history of the stock markets.
Remarkably, the S&P 500 is now just 50 points or 4% away from a new all-time high of 1,566.
This week we have prepared a special chart of the S&P 500 the covers the past 15 years. Many people are not aware that the highs that the markets are at today are near the same highs reached in the year 2000 and once again in 2007.
In the Photo Section is a chart of the S&P 500 that shows just how volatile the USA markets have been over the past 15 years:
(See Chart of The S&P 500 in The Photo Section)
As the chart clearly illustrates, the S&P 500 has once again returned to a level that was reached before in both 2000 & 2007.
This weeks current close at 1,516 is significantly higher than the recent bottom of 676 reached in 2009. - and as this chart clearly illustrates, the S&P 500 was up by 122% off it's 2009 lows when this record amount of money was invested in January, 2013.
We are also quite certain that the monetary authorities at the Federal Reserve have this type of chart on their computer screens and they fully intend to try to monetize the USA stock markets to a new all time high. The monetary authorities believe that an appreciating stock market will create a wealth effect that will stimulate more consumer spending and that will be helpful to the overall economy.
While Stock Markets Are Near All-Time Highs, The Average American is Rebounding From 30-Year Lows
For far to many people, the last five years have been a very challenging time. For the Millions of people who have had the misfortune of losing employment since 2008, the search for another job has required significant amount of time, energy, courage and resiliency. For everyone else who have been continually employed for the past five years, they should humbly count their blessings.
Because of the recent financial crises (and combined with some other structural changes in the economy) the recent economic performance over the past 5 - 10 years has had a significant negative impact on most people personal financial condition. To Illustrate the difficulty that many people are facing we present some work by the CredAbility Credit & Counseling Organization that tracks the financial condition of the Average American Household.
The Non-Profit CredAbility Credit Counseling & Education organization publishes an Index that reports on the Average American Financial Condition -it is called the Credability Consumer Distress Index.
The Credability Consumer Distress Index is a composite index that measures the average American household financial condition. The Consumer Distress Index measures 65 data points from the following sources and combines the 65 sources in to one composite number. The index is compiling information on the average American Household financial condition from the following five categories:
- Household Budget
- Net Worth
When the Credability Consumer Distress Index Index is
- Less than 60 People's Financial Condition is Emergency / Crisis
- 60 – 69 People's Financial Condition is Distressed / Unstable
- 70 – 79 People's Financial Condition is Weakening / At-Risk
- 80 – 89 People's Financial Condition is Good / Stable
- 90 and Above People's Financial Condition is Excellent / Secure
- Less than 60 People's Financial Condition is Emergency / Crisis
In the Photo Section is a 30 Year chart of the Credability Consumer Distress Index. The most recent reading for February, 2013 was 72.
(See Chart of The Credability Consumer Distress Index in The Photo Section)
This chart provides an excellent picture of the true economic and financial condition of most people in the country over the past 30 years.
Note that from 1980 - 2000, the Index was above 80 most of the time (above 80 means the average person was in a good financial condition).
Then in 2000 we see the Index drop below 80 and not return to above 80 until right before the financial crises hit in late 2007. The first seven years of the century saw a limited amount of prosperity that was fueled by the mortgage equity economy - but for many Americans they were not able to participate in that type of economic growth.
Then in 2007 we see the Index drop sharply as the financial crises developed. The Index reached it's 30 year lows of 64 in early 2010. Since 2010 we have seen a rebound to the 72 level that we have reached today. The 72 level however is still considered a weak and at risk financial position for the average American household.
The Index also confirms what the economic tea leaves have been indicating for the past 12 months. And that is the economy is improving for most people. However depending on economic indicator is being measured, this improvement is coming off of the worst levels in either 30 years or 80 years.
In general the overall economy has improved to a level that would be at the worst level of the most recent "normal" recessions that the country has experienced over the past 50 years.
And this is what makes the Stock Markets performance so perplexing to many people now. The stock market is near all time highs yet as the Credability Consumer Distress Index shows that for the average American, their financial condition remains very challenging at this moment in time.
Now the short answer to why the stock market is near all time highs is that this excellent performance of the stock market since 2009 is the result of record amount of money printing and not quite so much the result of a strong economy with participation by most Americans.
With the USA markets within 4% of their all time highs and 121% off their financial crises lows we do not recommend that investors chase the USA markets here at this point in time. However we do acknowledge the technical strength of the markets and do believe that the S&P 500 will be higher later on in the spring.
Today investors need to have a global perspective in their approach to allocating their resources. Earlier in 2012 when the USA markets were near 5 year highs, we recommended that investors look to the Emerging Markets and the Chinese Markets which at that time were trading at 5 year lows. Both the Emerging Markets and the Shanghai Markets have since performed very well over the past three months.
Following the philosophy of going to where the values are we note that today the Brazilian Markets have vastly under-performed the S&P 500 and are trading near multi-year lows. There could be opportunity here or at least a starting point for research.
As with all investment ideas we recommend that you consult with your financial adviser to determine it's suitability for you.
John Patrick Bray, CPA, is President of Bellevue-based Reliance Investment Management LLC a Registered Investment Advisor Firm.
This communication reflects the opinions of Reliance Investment Management LLC and is being provided for informational purposes only and is not intended as a recommendation, an offer or solicitation for the purchase or sale of any security referenced herein or investment advice. It is being provided to you on the condition that it will not form the primary basis for any investment decision. We recommend that you consult with your investment advisor before the purchase or sale of any securities. The information contained herein is of the date referenced and Reliance Investment Management LLC does not undertake an obligation to update such information. Reliance Investment Management LLC has obtained all market prices, data and other information from sources believed to be reliable although its accuracy or completeness cannot be guaranteed. Such information is subject to change without notice. The securities mentioned herein may not be suitable for all investors.