Markets On High Alert

When we said, two months ago, that the February 27 sell-off would ultimately prove to be a “non-event,” we honestly didn’t expect to be quite so right…quite so quickly.

Now, 1120 points later (to the upside) where does this market stand?

The typical bull market doubles in price off the market bottom in a rally that lasts, on average, 2 years and 9 months from beginning to end. This rally, now almost 4 ½ years young, is the fourth longest in U.S. history since 1900. However, in percentage terms the rally has been sub-par, which suggests more upside opportunity ahead. So is the rally almost over, as the calendar suggests, or is there more money to be made?

Two key variables will likely determine the outcome. In spite of many traditional signs of a slowing economy, the job market is strong so workers remain confident of their future, willing and able to keep spending. Jobs are a lagging indicator, though, with cutbacks usually a result of Corporate America tightening its belts in the face of declining profits. Each week’s unemployment claims news release may soon take on the same significance that money supply numbers held for the market 25 years ago, particularly as the Presidential campaign season progresses.

The other thing to watch is whether weakness in the dollar will ever result in foreign investors, particularly in China, Japan, and the United Kingdom, reversing their willingness to continue funding our government and trade deficits. They don’t need to sell their current holdings, which are massive, to impact our interest rates. They just need to stop buying, which would likely force our long-term interest rates much higher, make bonds a more attractive alternative to stocks, and cause some of the private equity folks (and their bankers) to re-think their “let’s leverage this thing to its eyeballs” mode of doing business.

Neither one of these indicators currently suggest that it’s time to step to the sidelines. April was certainly a fun month to be fully invested, and so far the year has been kind to investors. The bull market lumbers on. But it would be a particularly bad time to be complacent.


Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies.

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