by Hal Eddins, Managing Director, Capital Investment Council
For several reasons, I always look forward to Thanksgiving:
1. We are given the chance to give thanks for our many blessings
2. We get to spend time with family and friends
3. Thursday is a day off
4. Last but not least: over the last 30 years, the equity markets are up 88% of the time the week of Thanksgiving. In fact, Thanksgiving week may be the most bullish week of the year. As we eat turkey and watch the Detroit Lions, the European markets will still be trading, and the German Xetra Dax index has never closed negative on Thanksgiving Day. Keep all this in mind as we enjoy our well earned rest next week.
After a rough start to the year, it’s a relief to reach what is historically, the strongest part of the year. It would be nice to return after the Thanksgiving break and find that retail sales on “black Friday” were stronger than expected. I believe that the fear of rising interest rates will not put an end to November’s market rally. Rates are still so intrinsically cheap, that they could rise for quite some time before having a negative effect on economic growth.
What other factors could drive markets higher? After the Dow’s brief drop to 9600 in late October, the markets could well be back on track to make new highs into the end of the year. Why? The lack of negative earnings warnings and a general lack of sellers could possibly keep prices aloft.
Believe it or not, one reason for higher prices could be the government. While the economy has been hard hit over the last two years, governments around the world have responded with the largest peace time stimulus package ever seen. Interest rates remain near zero and at some point, the economy could see a positive impact from that.
Another period where we saw such a massive stimulus was October of 1998, and the Federal Reserve dropped rates three times in quick succession. This in turn laid the groundwork for the Nasdaq bubble that peaked in March, 2000. The thread continued with the Nasdaq’s implosion in late 2000 as this led to hefty rate cuts in late 2001/early 2002. This set of cuts likely helped push the real estate frenzy into “bubble territory” which was a major cause of the economy’s current woes.
To summarize, when the Dow’s rallied 3800 points off of the March 6 bottom, it was just reacting the way that it “should”. Some of the economy’s current liquidity is piling into the overseas markets and driving up prices. The Dow Jones Shanghai Index has rallied from a low of 192.57 last November 24 to a current price of 394. In fact, Chinese officials complained to President Obama just last week of this problem. In my opinion, if history is a guide, an improving economy coupled with a large stimulus package is not likely to lead to single digit equity returns. Many people who cashed in their stocks are finding that out now-the hard way.
Many consumers are still feeling the blues and it’s not hard to see why. Companies have not yet begun to rehire and until employment picks up, it’s unlikely that the public’s mood will lift. However, last month’s data from the Institute of Supply Management was better than expected at a plus 55 reading. Any reading over 50 indicates expansion and in the past this type of mid 50’s readings can lead to higher job growth. Overall, it’s a signpost that could be pointing to better times ahead.
What if our current rally is as good as it gets? Let’s revisit the ISM data I mentioned above. Again, with history as a guide, the market could see more upside. Remember that anything over 50 shows expansion and the ISM dropped as low as 32.9 back in late December. Even going back to October’s data, we see a reading of 52.9: a jaw dropper in this environment. Is this already priced in the markets?
Currently, the market is up 20.75% for the year (since the bottom of the ISM cycle). The average gain for the S&P 500 over a trough to top ISM cycle is 33%. On that basis, the S&P 500 has room to add another almost 60% to its current gain, and we would be right in line with the historical averages. Also, historically, over 1/3rd of the market’s gains came AFTER the ISM pierced 50 so we have that going for us as well.
Finally, we had a World Series that engaged the average American sports fan. In a rematch of the 1950 World Series, the Yankees were finally able to get some results out of their $218 million payroll. The Wall Street Journal took a look at what has changed in the 59 years between the two Series. In our current age of instant access, I found it comical that the New York Telephone Company would provide you with live updates every 15 seconds. One of the biggest shockers was the increase in ticket prices. A box seat in 1950 cost only $8.75 versus $325 for a non-premium seat in 2009. The big earner back in 1950 was the Yankee Clipper, Joe Dimaggio who brought home $100,000. His current day counterpart is the infamous Alex Rodriguez. A-rod collects in just 27 hours what it took Joltin’ Joe a year to earn. Finally, the winner’s bonus in 1950 was $5737 per player against the current rate of $351,504 per head. I hope everyone enjoys a nice Thanksgiving.