Four Reasons Why the Stock Market Continues to Soar
Sep 16, 2009
Posted by Jody Eisenman | Filed under Uncategorized
Many so called experts have been confounded by the breadth and scope of the market rally which has taken hold since March. Some caught part of the move; others continue to hoard cash waiting for the “second leg” to drop. I believe they are going to be waiting for a very long time. While corrections could come at any time, I believe that they will be short lived in nature. Here’s why:
1. The Credit Markets: Most stock investors do not pay careful attention to the bond markets. This is a mistake. As readers of this blog know, I was negative on the stock markets for most of last year, due to a great extent to the credit markets. Investors simply refused to buy anything that was not government backed or FDIC insured, which led to mammoth spreads between US treasuries and everything else. Since companies could not issue bonds, they could not grow. Even worse, they could not refinance their outstanding debt. It was hard to make a case for buying stocks when the debt markets were falling apart and yields on corporate bonds were soaring. Today, the credit markets have turned around on a dime. I don’t anyone who predicted such a monster move. What is truly incredible is that new corporate bonds are being issued at a phenomenal rate (now that the floodgates are open, everyone is trying to take advantage), but yields are actually dropping in the face of this.
Normally, new corporate bond issuance averages around $4 billion/day. According to Bloomberg, there were more than $20 billion of new issue bonds yesterday. Normally, such a huge increase in supply would cause an increase in yields. Instead, spreads are falling. There are many examples of bonds trading today at lower yields than they have at the beginning of the credit crisis, something truly incredible. This is especially true when we consider where yields earlier this year. Just as an example, 2 year A rated bonds were yielding 10% at some point in January in February. The current average yield is 2.32. I cannot recall any period in American financial history where yields have dropped so quickly. This is a very strong sign for the equity markets.
2. Market Sentiment: This too, has changed on a dime. Investors who wouldn’t put a dime into any stock, no matter how cheap it was, are clamoring to get in. Any negative news is shrugged off, and positive news is accentuated in the form of higher stock prices.
3. Money Managers: Many directors of great pools of wealth were very badly burned in 2008. As such, they became quite cautious in 2009. Therefore, many have missed the rally completely, and several have just barely participated. When the DJIA and S & P are hitting new highs, these people must get more heavily into equities. Otherwise, they risk looking quite foolish when they publish their quarterly reports. How is it going to look to an investor in a mutual or hedge fund that lost 25% last year, and is mostly in cash this year? The investors get angry, and the manager gets fired. The result of this is that every pullback is being met with a wave of fresh buying. Under this scenario, there are no large pullbacks.
How long this will continue is anyone’s guess, but I think that absent some extraordinary event, the stock market will continue to rise over the near term.
