September Song

Happy Labor Day! The summer’s nearly over, which means that Wall St. traders will be returning from their Hampton summer homes and getting back to work. Trading volumes should be much higher starting next week. And despite fears that September is the cruelest month for stocks (I don’t know about you, but I’m sick of hearing about it in the news), I see no reason for a big drop anytime soon. Minor pullbacks of –5% or so will continue to occur throughout the early phases of this new bull market, but a big drop of up to –20% seems highly unlikely.

I’ve given you many reasons over the past few months why I think the bear market is over and we’re in a new bull market that will not only reclaim the highs of 2007, but should surpass them. The former drivers of the bull market continue today: extremely low interest rates, low inflation, and rapidly normalizing credit spreads (3 month LIBOR is now 0.31%, the lowest in history). The bond yield curve continues to be very steep, with long-term interest rates far higher than short-term rates, which is great for banks, corporations and the economy, and of course for the stock market.

And don’t forget that there are still trillions of dollars in cash, money markets, CD’s and short-term Treasuries earning next to nothing. Money market balances alone are currently $3.58 trillion, which is equal to 34% of the entire stock market’s capitalization. Even after a +50% jump in equity prices from the March lows, this percentage is still higher than the 29% we saw near the market’s bottom in 2002. There’s also $3.5 trillion in bank checking and savings accounts, $trillions more in short-term Treasuries earning less than 1%, and $trillions in corporate bank accounts just itching to buy other companies. Thus there’s more than enough fuel to heat up the market for some time to come.

I remember back in the winter, people were arguing that stocks had to become as cheap on an absolute basis as they were in 1982 before we’d see a market bottom (although if you recall my March 10 article, they did become as cheap on a relative basis as in 1982 and 1932). Only then would investors be enticed to buy risky stocks in favor of safer investments. But this ignores an extremely important difference between 2009 and 1982: back then, you could earn 15% in totally safe short-term CD’s and US Treasuries. Why buy risky stocks with this kind of return from safe investments? Today, safe short-term investments earn 1% or less, making the long-term return from stocks that much more attractive.

On top of all the good news we’ve been hearing since the spring, including an apparent bottoming of the housing market and lots of corporations beating earnings estimates, another bull market driver arrived recently: the recession not only appears to be over, but the rebound is starting to look like the “V” everyone said couldn’t happen. What?! Could the terror of the last 2 years actually have been just a particularly long and deep recession rather than the end of the world or Great Depression II? And could the recovery and associated bull market be pretty normal, too, but perhaps even longer and stronger than average? Boy, wouldn’t this piss off the doomsayers! Only time will tell, but I wouldn’t be surprised to see economic growth of +4% or more for several quarters.

So during the Labor Day weekend, if you have to think about investments or the economy, look at the bright side. Forget about rising unemployment or an overleveraged consumer. As I’ve said recently, these are far less important to a recovery than the factors mentioned above. And by the time unemployment has fallen back to more normal levels and the consumer starts spending like crazy again, the bull market will be mostly over. When everybody’s happy and can’t see any clouds on the horizon is when I start to worry. But that’s obviously a long way off.

Party hearty (but healthfully)!