by Alexander Green, Oxford Club Investment Director
Monday, March 23, 2009: Issue #961
That’s the question on investors’ minds right now: Does this stock market rally have legs?
Let’s set aside the obvious answer – no one knows – for a moment and consider what many investors simply refuse to believe: That we’ve seen the market lows.
Why are so many skeptical on this count? Because virtually everything they see and hear tells them the economy is going to get much worse in the months ahead.
And they’re right. It will.
- The economy is losing 600,000 jobs a month.
- The banking system remains dysfunctional.
- Real estate is mired in quicksand.
- Retail spending is anemic – and still falling.
- And consumer confidence is at record lows.
It doesn’t take Isaac Newton to see that the economy will get worse. If there were a direct correlation between the economy and the short-term direction of the stock market, we would know just what to do with our money now.
Stock Market Rally or The Great Humiliator?
But there isn’t. Perversely, the stock market often tanks when times are good and rallies when the outlook is poor. Money manager and Forbes 400 member Ken Fisher doesn’t call the stock market “The Great Humiliator” for nothing.
Notice, for example, that there was no big news item that sparked the rally two weeks ago. (Yes, retail spending was a little less bad than expected and shipping rates have turned up slightly, but these are small potatoes.)
So why did the market suddenly lift off and soar 17% over seven sessions? Let’s start with the fact that the market was down more than 55% from its high 16 months ago. It was oversold and due for a relief rally, if nothing more.
But is this just the proverbial dead cat bounce?
It could be. Then again, valuations – like price-to-sales and price-to-book-value – were so low two weeks ago that the market was pricing in everything but another Great Depression.
Moreover, investors are famously bearish at market bottoms. And lately – to quote backwoods sage Jed Clampett – sentiment has been “lower than a hog’s jaw on market day.”
I can’t count the number of times I’ve heard even relatively sophisticated investors say, “I’d rather earn a fraction of 1% in a money market than lose money in the stock market.”
Hey, so would I. And if I knew the market were going much lower, maybe I would. But I can’t possibly know that. And neither can anyone else.
The Dow Delivers Greater Return Than A Money Market
Meanwhile, those folks tucked away in cash may have noticed that in less than two weeks the Dow has delivered a greater return than a money market fund compounding at current rates for more than two decades.
How does that feel?
Some investors say they’ll come back to the market later, when it’s acting better. But that’s like saying you’ll wait and buy that new Toyota when it finally gets more expensive.
Why is that the smart thing to do?
Other investors have been pushed to the limit. They say they’ve had it. They’re done with the stock market for good.
Hmm. That sounds suspiciously like me when I step on the bathroom scales. “I’m done with all those carbs. From now on, it’s nothing but egg whites and tuna fish salads for me.”
Considering Stock Market Investment Alternatives…
At some point, investors will calmly and rationally consider their stock market investment alternatives.
- Will you reach your retirement goals by putting your money in real estate even though it will almost certainly fall further since so many sellers have zero equity and therefore haven’t lowered their prices? (Good luck with your mortgage application, too.)
- Will you put it in Treasury bonds that are yielding a less-than-mouthwatering 3%? (So your money doubles in 24 years.)
- Will you put it in a money market fund that offers a negative return after taxes and inflation?
- Will you plow it into gold which has tripled over the last six years, earned virtually nothing over the last 29, and delivered only slightly more than inflation over the past 2,000?
Maybe the U.S. stock market – which has had blank decades before but has averaged 10% a year for the past 200 – doesn’t look so bad after all.
But back to our original question, should you buy into this rally?
Of course you should. But – following our time-tested discipline – stick to quality, diversify and run a trailing stop behind each position for unlimited upside potential with limited downside risk.
What should you buy?
Fortunately, we’re holding our annual Investment U Conference in St. Petersburg, Florida this week. We’ll be broadcasting from there daily – offering a number of strategies and dozens of fresh buy recommendations.
So stay tuned… and stay invested.
Today’s Investment U Crib Sheet
For years, investors and Wall Street traders have used the expression “dead cat bounce” to describe price activity after a steep decline.
The phrase usually refers to a false rebound. The theory goes that even a dead cat will bounce if it falls far enough. Many times these bounces signal that fundamentals have not changed, but instead are only a temporary break from a negative trend.
Time will tell if we are hitting bottom, or if this is just a temporary reprieve. In the meantime, investors can look at these market corrections as opportunities to purchase great companies at a discount.
History shows that investors who buy into a bear market at this stage – or at least hang on – are well compensated in the years that follow.
When it comes to investing, Warren Buffett once wrote on why it pays to look ahead:
“Someone’s sitting in the shade today because someone planted a tree long ago.”