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Wed, Feb 20, 2013, 9:53 AM EST - U.S. Markets close in 6 hrs 7 mins

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This Rally Is in Its Infancy

By Yahoo! Finance | The Exchange 22 hours ago Email Recommend 21 Tweet 23 Print

By Andrew S. Parlin There are two decidedly different ways to look at the markets rally. The first one invites caution. From its March 2009 low nearly four years ago, the S&P 500 has compounded at a spectacular annual rate of 24%. Against the backdrop of a long list of overbought signals, a cloudy earnings picture, and an economic recovery that appears to be struggling, why not bail? After all, this has been one heck of a good run. The other way to think about the market is to study its progression since WWII and note that the two very long secular rallies (1942-1968 and 1982-2000) were punctuated by two periods where the market took a very long time to advance to new highs (1968-1982 and 2000-?). This approach would acknowledge that markets may well be extended on a shortterm basis. But it would also beg the question whether we may at last be coming to the end of one of those protracted periods of going nowhere. At the Inflection Point During the 14-year period from 1968 until the summer of 1982 the market did anything but move sideways, yet it was well capped on the upside throughout the entire period save for a brief fake-out in late 1980. It then broke out furiously beginning in mid-August 1982 as the market recognized that the long hard battle against inflation had finally been won. Similarly, today, the market may well be signaling that Bernanke is winning one of the most obstinate battles of disinflation since that Great Depression. Perhaps the long nose of the market is sniffing out a pickup in GDP growth and a return to more normal times. This would include a healthy inflation cushion of 2.5-3%.
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http://finance.yahoo.com/blogs/the-exchange/rally-infancy-155541453.html[2013-02-20 9:53:38 AM]

This Rally Is in Its Infancy | The Exchange - Yahoo! Finance

Markets do indeed appear to be at an inflection point. We seem to be leaving the post-crisis era of what might best be called the reluctant rally of 2009-2012 and entering into a new phase marked by a structural shift in asset allocation preference and even a healthy return of greed. Credit the Fed What is the basis for such optimism? After all, didnt GDP contract slightly in the fourth quarter? While it is true that growth has been disappointing, the headwinds that have restrained GDP are abating. The big macro uncertainties of Europe and China have receded dramatically. At the same time, with each passing month we get closer to greater clarity on how the fiscal cliff standoff will play out. Even a bad deal will at least remove the scary nature of a big unknown. The diminishing risk of fat tails will allow the cumulative impact of negative real interest rates to gain traction. Quantitative easing is working. It has kick-started a recovery in housing and autos, traditionally the two key leading sectors of recovery. It has also led to extremely buoyant conditions in credit markets, a boon to medium-sized businesses. What few investors have realized is that the Bernanke game plan is meeting with tangible success. This explains the markets extraordinary resilience. But whereas QE1 and QE2 were crisis-fighting policies, QE3 was designed as a proactive, outcome-based program. The desired outcome? An unemployment rate of less than 6.5% (versus todays 7.8%). This Is Not a Bubble Only a much faster rate of economic growth can drive unemployment down to that level. The sequencing is really quite simple. Keep rates across the whole maturity spectrum low enough for long enough and capital markets are lifted above a critical threshold. What is that critical threshold? The point at which financial conditions become so benign that they awaken good old animal spirits in the real economy. While some dismiss Fed policy as creating the next bubble in credit markets, this is a misuse of the word bubble. A bubble describes an excess that eventually self-destructs. This, in contrast, is a healthy tonic for a very fragile economy. It is the only pathway out of a long-lasting liquidity trap. Just ask the Japanese about whether liquidity traps cure themselves. They dont. It takes a policy shock. This is exactly what the Fed is delivering. The precondition for a better economy is a powerful and long-lasting rally in stocks and credit, thus driving down the cost of capital for American business. More to Come We are reaching a turning point where robust capital markets finally inject optimism into corporate decision marking. Recent activity in M&A is reflective of this. And it suggests that we are on the cusp of a new cycle in private capital spending. All of this points to an improvement in labor markets, better growth in personal income and a sustained improvement in final demand. The really good news is that Bernanke knows all too well that monetary policy must remain highly accommodative until the economy is without any question on a firm footing. After all, it was the premature withdrawal of monetary stimulus in 1932 that turned a recession into the Great Depression. We are a long way from the next tightening cycle, particularly given a very large output gap and the contractionary impulses that are about to come from higher taxes and smaller public sector outlays. Rarely do central bankers keep such forceful monetary stimulus in place well into an economic expansion. But this is the unusual dynamic at work today. It is nirvana for stocks, which is why the 128% advance off the 2009 lows should be viewed as little more than a return to baseline. The next big secular rally has just begun. Andrew Parlin is co-founder of Kotell Advisors LLC, an investment company based in New York City
Related Quotes: ^DJI 14,035.32 -0.35 (-0.00%) ^GSPC 1,528.89 -2.05 (-0.13%) ^IXIC 3,211.22 -2.37 (-0.07%)

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http://finance.yahoo.com/blogs/the-exchange/rally-infancy-155541453.html[2013-02-20 9:53:38 AM]

This Rally Is in Its Infancy | The Exchange - Yahoo! Finance

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89 comments
Ricosu

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21 hours ago

Buy and hold! Per a study by MSSB between 1980 and 2010 there were 7500 days. Had you missed the top 50 up days you would have missed 98 percent of the advance or rather than gaining an annual return of around 8 percent it would have been .02. Something to think about.

Robert Jackson 21 hours ago

Stock picking and market timing, the never-fail method of "beating the market".

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Sierrawave_92007

18 hours ago

"Keep rates across the whole maturity spectrum low enough for long enough and capital markets are lifted above a critical threshold." Or be a rain dancer and dance every day for rain. When the rain comes, claim success from your dancing.

FreedomHawk

20 hours ago

Our business is down 30% since the fall. It's getting even worse...

Garym

19 hours ago

Get real.

Max

18 hours ago

Paychecks smaller, gas, food, and healthcare higher, consumer confidence down.....this

http://finance.yahoo.com/blogs/the-exchange/rally-infancy-155541453.html[2013-02-20 9:53:38 AM]

This Rally Is in Its Infancy | The Exchange - Yahoo! Finance

baby has no where to go but up

Wade

21 hours ago

The Wall Street shills can pump the market all the want. I do not choose to buy when the market is at a 5-year high. The market never goes straight up or down. There is too much euphoria--we'll see a correction soon.

Kurtis

19 hours ago

When they use "not a Bubble"....i get concerned.....they used the same terms in 20062007

Jim

17 hours ago

Why rally is in infancy? It's riggerd. FED buying $85B/month of junk securities. FED window at 0%. GEEZ idiots. You throw $trillions at ball-sacs, and ball-sacs will be a good investment!

Sierrawave_92007

18 hours ago

Interesting journalism. I think the stock Market will rise as well but for way differing reasons than this journalist is reporting. Either way, we both expect to increase wealth if you buy stocks, the reason has nothing to do with it. One difference between me and this journalist. What you buy and what you sell and why.

Sierrawave_92007

18 hours ago

"Rarely do central bankers keep such forceful monetary stimulus in place well into an economic expansion." Could it possibly be central bankers do not see any "economic expansion" and are trying to achieve some? Bottom line, GDP could easily be increasing with inflation alone and no economic expansion taking place what so ever. Equating GDP to economic expansion with price increases from inflation alone can be very misleading to a casual observer. Buying stocks because of economic shrinkage leads to a totally different portfolio then buying stocks expecting a recovery when there is no recovery, just higher prices from printed currency.

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http://finance.yahoo.com/blogs/the-exchange/rally-infancy-155541453.html[2013-02-20 9:53:38 AM]

This Rally Is in Its Infancy | The Exchange - Yahoo! Finance

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http://finance.yahoo.com/blogs/the-exchange/rally-infancy-155541453.html[2013-02-20 9:53:38 AM]