[StBernard] Thoughts On The 35% Stock Rally

[Westley Annis]

Thoughts On The 35% Stock Rally
Is the stock market's incredible 35% rally in two months a bear rally or the
real McCoy? I'll speculate later in this blog. I do know that stocks were
artificially and wildly oversold when the S&P hit its satanic 666 low on
March 9. 

On March 10 I wrote this:

Saturday evening in Prescott, Ariz., I walked the town square looking for a
meal. One cafe had this sign in the window:

"DEPRESSION CHILI--$2 a Bowl."

In normal times, this sign would constitute a clear buy signal. Of stocks,
not chili. Advertising slogans are a barometer of the popular mood, so when
images of soup lines are used in advertising, it means Great Depression fear
has saturated the culture. From an investor standpoint, the fear is
oversold.

On March 13 I wrote "Twenty Reasons To Be Optimistic."

Making a bullish contrary call was not hard. The 2008-2009 panic was always
oversold. The American and global economies were never close to a state of
economic collapse. That was always fiction, aided and abetted by the
mainstream press. What we experienced was a recession that looked new and
terribly frightening for four reasons:

1. We hadn't seen a nasty recession since 1982. By "we" I mean most of the
world's traders.

2. After Lehman's collapse on Sept. 14, the global financial system blacked
out. The blackout was not one of electricity or bandwidth failure. It was
due to confusion about loan values on bank balance sheets.

3. Rule changes at Financial Accounting Standards Board and the SEC in 2007
tilted the investment field crazily to the advantage of short sellers from
November 2007 until April this year. Smart guys like John Paulson and George
Soros figured that out. 

4. The panic started when Bush was a lame duck, and a left-leaning candidate
of little experience looked poised to win the election--and did.

Where do stocks go from here?

For months I've noted that this recession reminds me of 1973-74. The causes
of the two recessions weren't the same, but the stock market losses and
unemployment figures are similar. Political tension was thick then (after
Watergate) as now. The 1976 election gave us an unknown reformer named Jimmy
Carter, 61 Democrats in the Senate and a two-thirds Democratic majority in
the House. Some liberal senators, such as Idaho's Frank Church, led show
trials on the CIA's perceived perfidies. Environmentalism and climate change
were all the rage.

Sound familiar?

Today's stock market might be replaying 1975, when returns were up 38.46%
for the year. Here are the S&P's compound annual growth rates following the
1973-74 recession:

S&P CAGR

1973    -15.03
1974    -26.95
1975     38.46
1976     24.20
1977     -7.78
1978      6.41
1979     18.69

Of course, the returns in the 1970s weren't as good as they looked.
Inflation worsened your losses and robbed your gains:

Annual Inflation Rate:

1974    11.03%
1975      9.20%
1976      5.75%
1977      6.50%
1978      7.62%
1979    11.22%

If you were lucky to have gains, these were taxed at 50% until 1979, when
the rate dropped to 28%.

If we are replaying the 1970s, then stocks are in a bear market rally. The
rally could last another six to 18 months and bring the S&P to the 1,000 to
1,100 range. Eventually, anti-business political headwinds will stop the
march. That is, unless the 2010 election is a game changer like 1994, which
turned President Clinton back to the political center and toward pro-growth
policies. However, the chances of that happening don't look good.