Happy Anniversary Bear Market Rally

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Time sure does have a way of passing us by quickly.

One year ago this week, the Dow Jones Industrial Average fell to a 12-year low. The exact date was March 9, 2009, and the low recorded by the Dow Jones that day was 6,440.

You may remember March 2009. For most investors and businesspeople, it was the end of the financial world. The Dow Jones, after having peaked at 14,164 in October 2007, fell 54.5% by March 2009. Most investors, instead of holding on, panicked and bailed out of stocks in the first and second quarter of 2009. (Big mistake; panic sellers and panic buyers always turn out to be losers.) Many mutual funds, for the first time, saw net redemptions.

One point I would like to stress, and this is extremely important, is that, at the March 2009 lows, stocks never became true values. Bear markets end in exhaustion, when dividend yields are over six percent or when price/earnings multiples are below 10. Stocks never got close to these valuations in March 2009, thus my belief that we have been experiencing a bear market rally since March 2009 and that the lows of March 9, 2009, will be eventually tested.

Since March of last year, the Dow Jones has risen 60.9%. Most investors lost out on this huge advance. Today, we are at a pivotal point in the markets, where one group believes that the bear market rally is over and a second group (which I’m in) believes that the bear market rally has more leg left to it.

There is no doubt that corporate profits have recovered. With large companies slashing their payrolls, focusing on core businesses while enjoying interest rates that are low, corporate profits have gone up. But on the other side of the coin, the long-term damage to the economy cannot be discounted: Millions of Americans are unemployed, millions of homes are either in foreclosure or are worth less than their mortgages and trillion-dollar annual government deficits have become the norm. As for small business, the backbone of the U.S. economy accounting for about 70% of all employment, very little has been done for them. Most are still struggling.

Yes, it’s happy anniversary to the bear market rally that started in March 2009. Unfortunately, my feeling is that, one year from today, once this bear market rally is over, there will be a lot less to celebrate.

Michael’s Personal Notes:

The more I read, the more criticism I see about the White House spending too much time on the proposed new healthcare program, as opposed to concentrating its efforts on fixing the economy. But, unlike other market commentators, I can’t see what else the current administration can do for the economy except buy the mortgages of the five million homes, which are more than the value of the homes.

Billions, make that trillions, were committed by Washington towards helping the economy, and we still have over 10 million Americans unemployed. The Great Bailout didn’t work. All it left us with is a $1.6-trillion dollar annual deficit and a projection that total national debt will hit $20.0 trillion before the end of this decade. (I wrote early on during the credit crisis that all the government intervention would do was create a big financial hole for us.)

During the Great Depression, a program was started by the government, whereby the mortgages extended by banks to homeowners in trouble were purchased by the government. This maneuver enabled banks to turn non-marketable mortgages into cash. With five million homes in the U.S. worth less than the mortgages on them, I see this measure (of the government buying these mortgages) as a good move. If the government doesn’t make this move, expect the next shoe to fall in the housing market. How long will five million homeowners continue monthly payments on a mortgage that is greater in value than their home?

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in PROFIT CONFIDENTIAL, December 4, 2007. The devastation Michael was talking about started happening in the first quarter of 2008.