The adversity of the past three-year bear market in US equities has been steadily forgotten over the course of 2003, as we enjoy the present blessings of a stronger economy and a nine-month-long rally. Investors and speculators are now stressed with the question of how much longer the good times will last. The major worry is whether it is too late to join the party. The most important question on everyone’s mind is: Am I going to miss out if I do nothing, or am I going to buy at the top if I chase this market at this point? Folks have gotten quite excited. What began with such nervousness and anxiety in early March has now flourished into a full-fledged, wide-open speculation. There’s a lot of optimism that good things are about to happen next year in the economy and the stock market. We’ve seen lots of cheerleading and speculation when not much has occurred yet. This rally was predictable by many, even the bears, but no one, not even the bulls, predicted that this rally will go this far and this fast. As always, we can find compelling arguments for both the bullish and bearish perspectives. One thing that makes the market so difficult is that very logical points of view can always be made for both sides. We can easily find ourselves swayed back and forth as we listen to the arguments. The bulls will tell you that beneficial monetary and fiscal policies, a continued decrease in risk aversion, and attractive relative valuations are evidence that positives outweigh negatives at the moment. The weakness in the dollar has no historic correlation with stock market returns. In addition, unemployment, which has stayed at a pretty high level throughout this recovery, is a classic lagging economic indicator. It is common for the unemployment rate to rise after the end of a recession. This period seems to be no exception. In addition, in the short term, seasonal factors favor stocks, as November and December are typically the strongest period of the year. The bulls conclude that we have now turned the bear page and we are currently enjoying a new bull market that could last for several years to come. Bears, on the other hand, say that there are no signs of a real improvement in the economy. The Fed has greatly increased liquidity, and this has resulted in asset inflation. This has meant rising stock prices and rising home prices. Stocks and homes are now priced at treacherously high levels. Valuations, especially in the Nasdaq, are still way high. The national debt is now around $35 trillion, as compared to a $10 trillion economy (GDP for the US).
Consumers have leveraged up appreciating home values to live beyond their means. But they are so spent up that auto sales are deteriorating, despite zero-percent financing and tax rebates. There has been some good news from certain tech companies. But that’s because they are the companies that sell to other companies that may be building up inventory. After this bear market is finally over, almost no one will remember the hyper bullish psychology that existed in the summer of 2000, the spring of 2001, the spring of 2002 or the fall of 2003. All these rallies will be labeled corrections in a secular bear market.