Good Evening; Unless you’ve been in a cave or in meetings all day, you know by now that U.S. stocks were kited to new highs today. And that’s really all you need to know. There was a batch of reasons given, from economic data to corporate earnings, but the biggest reason for today’s surge was the surge itself. In carrying to new highs for the year, rising stock prices forced shorts to cover and underexposed longs to feel uncomfortably overexposed to cash. As the day progressed, it almost seemed as if the “all clear” siren had sounded somewhere, indicating that the storm that knocked our economy and markets around for months was now over. With a swelling consensus that the bear market is now in hibernation, investors don’t want to miss out on the historic bull market that is sure to follow. Or so went today’s frenzied logic. As we shall later see, in both sports and investing, the desire to avoid missing out on history is a powerfully motivating force.
A raft of corporate earnings reports too numerous to mention came out during the past 24 hours, and they were mostly of the positive surprise variety. U.S. stock index futures were already trading higher due to these reports when some good news on jobless claims surfaced. New claims rose by a slightly less than expected 30K, but the bulls were especially heartened to see continuing claims drop for the second straight week. A 3.6% rise in existing home sales and a reduction in the backlog of unsold homes only reinforced the rationale for buying stocks today.
Opening higher, the major U.S. averages marched northward until they were all up more than 2% after 100 minutes of trading. The rest of the session was spent going sideways, but the rally really never suffered any setbacks today. By day’s end, the Dow (+2.1%) could brag the least, while the Russell 2000 and Dow Transports (both up 3.25%) vied for top honors. Predictably, the perceived parting of the storm clouds left Treasurys feeling unloved and unwanted. Yields rose 7 to 14 bps across the curve, and if recovery has indeed come (which, other than some welcome inventory rebuilding, I personally doubt), then Treasury yields are too skimpy to stay at these levels. Given the fast rises in stock and interest rates, the dollar probably should have rallied more than the modest amount it did today. But the uptick in the greenback didn’t hurt commodities, and most of them went up along with equities. The CRB index tacked on 1.75% to what has become an impressive run in recent weeks.
“Want two free tickets to this afternoon’s ballgame?” was the question posed to two of my colleagues as they returned from lunch this afternoon. Visions of a fun afternoon away from work watching the White Sox flashed before there eyes, but these team players decided to turn down this gift and return to the office. Little did they know that White Sox pitcher, Mark Buehrle, would soon become only the 16th pitcher in major league history to throw a perfect game (see below). Nor did these poor souls know that White Sox outfielder, Dewayne Wise, would heroically save the perfect game (and Buehrle’s no-hit shutout) by leaping above the left field wall to snatch a home run away from Tampa’s Gabe Kapler in the ninth inning. The circus catch only added to the sense of history made in Chicago today.
My colleagues were kicking themselves when they heard the news, just as under-invested kicked themselves when they saw today’s rocket launch in equities. The NASDAQ has been the focus of the run since the March lows, as managers use the beta-heavy names in that index as a way to play catch up ball. The NAS is now up a cool 54% in just over four months, prompting some to wonder if they, like those who passed up on the free Sox tickets this afternoon, are missing out on history in the making. Of course, the NASDAQ has been up 50% or more in roughly six months time on three other occasions during the past ten years. From August of 1999 to March of 2000, the NAS rose a stunning 110%. From September of 2001 to January of 2002, the tech-laden index rose just more than 50%, just as it did from March of 2003 to September of that same year. The sharp-eyed among you will note that devastating losses followed these quick gains in both 2000 and 2002, while the 2003 rally was followed by two years of sideways action.
The 2007-2009 bear stock market has been the worst almost any manager has ever lived through, and no one wants their son to ask them, “Daddy, why didn’t you buy stocks at the bottom like Chester’s Dad?” They don’t want the boss (or clients) asking them the question, either. This rally may thus keep running, despite its overbought condition and some setbacks along the way (one of which might start tomorrow after MSFT’s earnings miss tonight). I could easily see others feeling compelled to participate before the S&P 500 returns to 4 digit territory. As with sports, it’s the same with investing: It’s how our decisions might look in retrospect that causes fearful decision making in the present. My friends would have loved to attend the Sox game, especially for free, but they worried what the man in the corner office might think if they couldn’t be found. Like those who watch over other people’s money, they managed away from potential pain and found a different form of it. Let’s hope the same doesn’t happen to those who feel like they have to chase the rally on Wall Street.
— Jack McHugh