As you all know, I think we are in a secular bear market rally/cyclical bull market right now. So, yes, this has been and may continue to be a powerful up-move in shares worldwide. However, I am certainly not convinced we are off to the races for the long-term here.
Now that we have gotten the stress tests out of the way and banks are falling all over themselves to issue shares, you might think this signals the beginning of a renewed upswing, underpinned by the green shoots of economic recovery. But, the signs of underlying weakness have begun to pop-up. Here are but a few examples:
- Hitachi posts record loss for Japanese manufacturing company
- Slowdown in UK manufacturing sector almost stands still in March
- Chinese exports fall sharply
Let’s not fool ourselves that the incipient signs of recovery means a robust or long recovery. Leo Kolivakis makes a good case for a ‘W’ recovery i.e. double dip. Right now, I would put myself in the VL camp, double dip with a weak longer-term outcome.
What does this mean for the stock market? I think it means we should take caution. We have already seen a powerful rally and the stress tests are the buy-the-rumour, sell-the-news event in my opinion. Taking money off the table now is a good idea.
I think shares can rally again for another two quarters due to upside earnings surprises. But the outlook is murky beyond that point. I am not saying a multi-year recovery and rally is impossible. I AM saying that the fundamentals do not justify a secular bull market.
So, if you think this is a bear market rally you will like the four posts below.
- The Great Depression vs the Long Depression: Chart of the day: Dow 1914-1929 vs. 1982-1999
- 1970s Bear Market: Chart of the day: Dow 1973-1974
- The Great Crash: Chart of the day: Dow 1928-1932
- Japanese bear market: Chart of the day: Japan 1984-2004
Below is also a MarketWatch video of Peter Eliades explaining why he thinks this is a bear market rally.
“Peter Eliades of Stockmarket Cycles says the Dow still could retreat to 4,000. He tells MarketWatch’s Stacey Delo that the current range at the 8,400 level is an important benchmark to watch.” Louise Yamada has been singing the same tune since March.
I would not put myself in the super bears camp with Yamada or Eliades. After all, I have been talking a lot about green shoots and cyclical bulls of late. And they are much more concerned with technical analysis than I am. Nevertheless, I do think we have some significant headwinds economically that are going to inhibit a sustained secular bull market from starting. We will need to see inflation-adjusted lows further down than this before that is possible.