— “Profit Confidential” Column, by Michael Lombardi, CFP, MBA
We made it.
The bear market rally that started in March of 2009 brought stocks to a new post-crash high yesterday. The Dow Jones Industrial Average opens this morning at its highest level since October 2008 and only 111.17 points away from my prediction of Dow Jones 11,000.
How did we get here?
We got here (to a new 18-month stock market high) because companies slashed payrolls, slashed spending, took advantage of interest rates that were low and started focusing back on their core businesses.
Let’s face it, the economic boom years that ended in 2006-2007 resulted in many companies acquiring companies they shouldn’t have, companies opening new divisions, hiring people they didn’t need, getting involved in businesses they knew nothing about.
I remember being at a cocktail party in New York in 2006 and a lady trying to explain to me what she did at a large financial institution that just hired her. From my knowledge of her, she knew nothing about finance. And, for the life of me, after listening to her for an hour, I still couldn’t figure out what her job was.
And, of course, the stock market would not be moving higher if the Fed was keeping interest rates at historically low levels. Forget the fear following the market lows of March 2009. History has proven that whenever the Federal Reserve drops interest rates aggressively, a higher stock market follows 12 to 18 months later.
For my fellow stock market analysts, I have this to say:
The trend is your friend. Always has been. Always will be. Don’t lose sight of this.
I read three research reports this past weekend from well-known stock market advisors that all predicted the market was going to crash. But, here we are mid-week and the market has moved to a new 18-month high.
Yes, we all know the U.S. dollar is headed for the toilet. Some of us know hyper-inflation follows extended periods of zero interest rates. I’m in the camp that believes the Fed is being too slow at raising rates again to cool the stock market. And I still believe the stock market lows of March 2009 will be tested.
But the bear market doesn’t work in days or weeks; its plan evolves over months. The bear market is working exactly as I predicted it would: bring the stock market higher after the initial down leg (that ended in March 2009), so investors believe the worst is behind us, lure as many investors back into the stock market, and then move the market down to the next leg, which is usually lower than the first.
For my dear readers:
As I have been saying since March 2009, enjoy this bear market rally while it lasts. If you followed my advice and jumped into stocks in March 2009 and have held on, you are doing just fine. There is more money on the table for you for now.
Michael’s Personal Notes:
Yesterday, after the Dow Jones rallied 103 points, reporters were quick to credit a France, Germany and IMF aid package for Greece as the reason the market rallied. Nothing could be further from the truth. Yesterday was a classic bear market rally to lure investors back into stocks. I don’t believe the stock market could care less about Greece’s problems. After all, isn’t the U.S. just as financially broke as Greece?
There was no doubt in my mind that fellow European Community countries would help Greece with its debt problems. I have written about this before. Germany’s Angela Merkel wants the IMF to bail out Greece. France’s Nicolas Sarkozy wants a “European solution.” In the end, they will do what they need to do to save face with their euro.
Where the Stock Market Stands:
The Dow Jones Industrial Average sits 4.4% higher this morning than when it started 2009. There is not much else I can say about the stock market that I haven’t already said in my lead story above.
What He Said:
“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: Borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.