We have discussed the general complacency of traders as evidenced by the market climbing higher despite a universe of potentially ugly issues.
In one camp, we have the Wall of Worry crowd (WOW!), that claims the market needs this negativity to create sellers and short interest, reluctant cash holders, all of whom eventually become buyers who drive the market higher. This group sees the market rallying despite Oil at $75 and Gold over $600 as proof of economic strength.
Standing inapposite to the W.o.W. crowd is the What, Me Worry? group (including your humble scribe). These folk have looked at the historical data, the cycles, view past as prologue to present. The commodtiy boom and inflation present specific dangers. We see longer term structural issues as a situation that can only end badly.
Those are the battle lines. Its not so much the Bulls versus the Bears; Rather, we see each group projecting onto the other the shortcomings they identify in each: The Bulls see the Bears as worrywarts missing all the fun; The Bears see the Bulls as Alfred E. Neuman, blithley ignoring the coming debacle.
Its not too hard to figure out where the aforementioned Up and Down Wall Street Column comes out in the debate:
DOLLAR LOSING ITS HEGEMONY? No worries, says the stock market. Neither about crude oil topping $75 a barrel Friday nor copper climbing past three bucks a pound, nor about President Bush’s approval rating hitting 33% in a new Fox News poll, new highs and new lows, respectively. And higher-than-expected consumer-price increases or bigger-than-expected falls in housing starts? Fuhgeddaboutit…
The reason for the bulls’ devil-may-care attitude was the strongest hint yet that the Federal Reserve may be at the end of a tightening campaign that started back in June 2004, when it began to raise the federal-funds target from just 1% to 4¾% currently. "One and done" has become the rallying cry, with the all-clear set to be sounded when the Federal Open Market Committee kicks the overnight rate up a quarter to 5% on May 10. Minutes of the March FOMC meeting, released Tuesday, suggested the panel was getting concerned about going too far in raising rates, which was good enough to tack a couple of hundred points on the Dow."
As we noted earlier today, this is the "Pause that Doesn’t Refresh." During the prior 9 interest-rate cycles, stocks have fallen an average of 7% between the time of the last Fed tightening and its first easing.
Why would this hearten the Bulls? The two exceptions to the rule: 1989 and 1995:
"The bulls’ euphoria no doubt is born of their memories of 1995, when it was off to the races when the Fed called a halt to its year-long series of rate hikes. But history suggests they may be getting ahead of themselves. According to a study from Birinyi Associates, since 1962, the Standard & Poor’s 500 has suffered an average decline of 7% from the time of the Fed’s last rate hike until its first rate cut. Only in two of these nine "limbo periods" did the market rise."
As we have repeatedly observed, these examples were aberrations, coming as they did in the middle of an 18 year secular bull market. I continue to see the most apt parallel as the secular Bear Market of 1966-82, with 2006-07 most similar to 1973-74 era.
You may also recall our Pause/Resume scenario. It turns out to be the usual historic pattern:
"Moreover, the Fed may not be finished with its tightening cycle next month, but may only be entering a pause period before reaching the ultimate peak in rates. Indeed, that is the usual historic pattern, according to Livingston Douglas, president of Mountain View Advisors in Denver. That was true case in the late 1970s until the 1981 peak, during the 1987-89 up cycle, and during the 1990s until 2000. Notably, the pauses in the ‘Eighties and ‘Nineties were punctuated by financial crises — the October 1987 stock crash and the 1998 Long Term Capital Management collapse — after each of which the Greenspan Fed resumed tightening."
Barron’s advises to "be careful what you wish for. An accelerating decline in real estate or some other financial accident certainly could bring about lower rates, though it’s hard to see how that would be bullish for stocks."
Bull Market in Bull
RANDALL W. FORSYTH
MONDAY, APRIL 24, 2006
UP AND DOWN WALL STREET