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October 18, 2004 |
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Despite the Dow’s peak in January 2000 and the Nasdaq’s peak in March 2000, the great bear market did not begin until April 14, 2000. Why April 14? Because April 14 is the day when the ‘margin bubble’ finally popped. To be sure, as the markets buckled early in the day it was reported that institutions were short selling stocks solely on the expectation of margin induced selling in the afternoon. These reports, combined with the startling sell off in stocks, had a lasting impact on investor psychology/liquidity…
To put into perspective how violent the sell off was on April 14, 2000, the S&P 500 was off by 101 points at its worst level (or a remarkable 7.01% intraday decline!) By contrast, and putting into perspective how boring 2004 has been thus far, the S&P 500 has traded inside of a 94 point trading range all year long (or a less than remarkable 8.8% trading range from January 2, 2004 to October 14, 2003.)
The argument could be made that in the long term a boring stock market is beneficial to the value investor in that it keeps gamblers from bidding up share prices to extreme levels. Nevertheless, even though stocks (S&P 500) are threatening to trade in their calmest yearly range in a decade, valuations remain significantly higher than they were a decade ago and well above their historical averages (especially if you expense stock options and recognize how overstimated pension assumptions are likely be this year). Thus, exploring the potential positives of a boring marketplace is futile at this time. Will The Range Be Broken in 2004? It is easy to list 10 reasons why stock prices are fundamentally overvalued, but it is impossible to argue that the fundamentals will play a key role in directing stock prices this year. By November a US President will have been elected and concerns over domestic terrorism will have either increased or ebbed. Even though the impact of the elections and/or the terrorism/oil situation is sure to move stocks, figuring out the potential investment scenarios that go along with these variables is better left to Merlin. Uncertainties aside, there are reasons to believe that the 2004 trading range will widen before years end. Besides ‘Bush Will Win’ and ‘Oil will crash’ scenarios, the bullish case is helped by using recent history to use a guidepost: in each of the last three years stocks have rallied in the last three months of the year.
As for the bearish case – and leaving ‘$100 a barrel oil’ and ‘Kerry Will Win’ speculations alone – remember 2000: despite the Dow peak in January and the Nasdaq peak in March, the great bear didn’t begin until the mini crash on April 14, 2000. The point to remember about April 14 is that no one specific news event sparked the decline. Rather, enough bad news (i.e. end of tech up cycle, overvaluation/mania fears) had previously piled up to the point wherein April 14 was made possible. The pace of economic growth is slowing, jobs growth is slowing, wage increases are weak, oil is trading at record highs, earnings growth rates are in decline, the value of the dollar is on borrowed time, consumer confidence is declining, consumer spending is choppy (at best), fund inflows have been lackluster since August, etc. In short, it goes without saying that the bad news has been piling up all year long. All that remains is another April 14, 2000 to kick start another down leg for the bear. Note to the bulls: in 2000 the markets lost ground from October-December. |
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