Obama’s Stock Market Genius

by Michael Lombardi, CFP

On March 3, 2009, President Obama had these words to say about the stock market: “What you’re now seeing is profit-and-earnings ratios are starting to get to the point where buying stocks is a potentially good deal if you’re got a long-term perspective on it.”

Did Obama call the current stock market rally?

Not sure. But his timing was impeccable. The above statement was made by the President on March 3. On March 9, the Dow Jones Industrial Average hit its low for 2009 at 6,440.08. Since then, the Dow Jones has rallied an unbelievable 1,577 points, or 25%.

Yes, the stock market is up about 25% since President Obama said it is getting “to the point where buying stocks is a potentially good deal…” Some stock indices, like the NASDAQ, have already regained all of their 2009 losses.

The President must be happy with his call. Investors surely are. But where do we go from here?

If we take it technically, the President’s comments on stocks being a good deal coincided with severely oversold market conditions. The Dow Jones has fallen like a rock since October 2007, when it traded as high as 14,164. From that high, the Dow Jones fell 7,724 points to its March 9, 2009, low of 6,440.08.

Huge stock market advances are followed by retrenchments of anywhere from 30% to 50%. Huge stock market declines are followed by rebounds of the same magnitude. Therefore, if the stock market regains only 30% of its loss, the Dow Jones would need to move back above breakeven for 2009. The advance could be even greater.

As an investor, I would take the market rally as a second chance to sell the stocks in my portfolio that I didn’t liquidate when the stock market came down so rapidly the first time. At present, the Dow Jones is selling at 26 times earnings. Being a time when investors and consumers are both looking for good deals, I fail to see the good deal here.

Michael’s Personal Notes:

I find it amusing to see how many politicians are turning economic forecasters. Take Canada’s Prime Minister Stephen Harper. After last week’s G20 Summit, Harper said that the worst is behind us. Here’s his exact quote: “Notwithstanding that the employment effects are growing, becoming real on people, the worst aspects of instability, I do believe are behind us.” While these words may be assuring to the public, especially Canada, whose banking system is so superior to the rest of the world, I wonder how many politicians have studied the stock market and know what a bear market rally is really all about. We don’t just have the bear market sucking investors back into stocks; we also have politicians giving their citizens false hope that the worst is behind us.

Where the Market Stands:

We are getting there. Only 759 more points and the Dow Jones Industrial Average will have regained all its losses of 2009. The number the Dow Jones needs to get at is 8,776.39. Today, the index opens at 8,017.59. If I was a betting man I’d say (like I’ve been saying all along) that the stock market will regain all of its 2009 losses and then some, before moving back down to test our recent lows. It’s a vicious game, but you can make lots of money being on the right side of the market. The Dow Jones Industrial Average is down a shrinking 9.5% for the year.

What He Said:

The year “2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter.” Michael Lombardi in PROFIT CONFIDENTIAL, August 24, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.