How Bernanke Boosts Markets

Within the past week, Ron Haydt caught my attention (during a market brief) when he wondered aloud how long the iShares Russell 2000 Index (IWM) had been trending upward. That started me thinking about our very long-lived market move upward from March 8, 2009, a move that I confess caught me very much by surprise (I take comfort in the fact that I am not alone in my surprise!).

Here is a homemade price graph of that move (based on Dow Jones Industrial Index prices from the St. Louis Federal Reserve[1]) from 2009 through July 24th:

Thus far, the move upward from the 2009 low closing price (March 9) to the July 23rd closing high of 15,567, has returned 137.78% (not including dividends).[2]

Before we look at any of the other upward moves since 1970, I need to mention that there are various and multiple ways that analysts and commentators have defined a “market correction”. Among the variations that I ran across in my review, I found metrics ranging between a 10% and 25% drop in market price.

That is why I inserted two arrows into the chart above – marking the move in 2011 (between July 7 and September 22) from 12,719 down to 10,734. That move measured -15.61% — a drop that certainly felt like a “bear market” in my portfolio.  However, the general consensus seems to be that we have been in a bull market since March of 2009.

Our current bull market is particularly remarkable when we recall the multiple “doomsday” scenarios that certain pundits and media outlets pushed last fall – warning that an impending triple-threat from “Fiscal Cliff”, “Sequester”, and “Debt Ceiling” could result in a precipitous market decline. As events played out, the market has scooted higher despite Congressional ineptitude, higher tax rates, and arbitrary federal spending cuts (“sequester”), as well as several other obstacles.

It is no “news flash” that the most potent force driving the market has been Federal Reserve (FED) monetary easing (made painfully obvious during the May/June “Taper Tantrum”). However, after Fed Chair Ben Bernanke made a concerted effort to emphasize that low rates and easy money will continue (for as long as it takes to move the U.S. closer to 6.5% unemployment and a more sustainably vibrant economy) the markets have reversed its swoon and moved upward, with some conviction, no less. One of the major “barometers” of investor enthusiasm and commitment has been “fund flows”, and July’s figures have offered a stark testimony to the as yet untapped financial resources that could potentially flow into stocks or bonds:

1)    During the first twelve trading days of July, ETFs tied to U.S. equities took in about $24.4 billion (about $2 billion per day).[3]

a.That pace is nearly four times the average rate between January and June!

2)    The SPDR S&P500 Index ETF (SPY) alone received $12 billion from investors in the first half of July ($1 billion per trading day).

a. SPY has now moved over the $150 billion level in assets for the first time ever!

3)    In a similar vein, Reuters reported that the current asset flow into U.S. equity funds is the most since 2008.

However you look at it, we’ve been in an uptrend for a long time. In fact, through the July 23rd high, it has been 1597 days! Impressive! But how does our current “bull market” compare with other markets within the past 45 years?

When I gathered and ran the data[4], I was struck by the results. This market falls into third place relative to magnitude of the upward move and fourth place relative to number of days[5].  Here is a chart summary:

In light of the above, let’s take a brief walk down “memory lane”. I alert you ahead of time that my “short-hand” description of each market is totally arbitrary and could be argued ad infinitum. So place no “authority” to it – it’s just one person’s view.

I) (1990-2000) THE RISE OF TECH/FALL OF USSR MARKET: At the start of these 3,380 days, we were basking in the excitement of the fall of the Berlin Wall in1989, and watched with rapt attention as we saw witnessed Germany re-unite, the USSR collapse, and the Warsaw Pact be dissolved. It was an amazing moment in history – bringing a sweeping reshaping of global geopolitics. For the remainder of the decade, we looked on as global tech giants emerged (see chart below: Intel (INTC); Cisco (CSCO); and Microsoft (MSFT)) and small, start-up tech companies managed to get Wall Street all too excited. Finally, we experienced something that sounds impossible these days – the President (Clinton) and Republicans managed an agreement that (for a time) produced a balanced budget (yes, it IS possible!). Unfortunately, this market was brought low (very low) by the excessive exuberance that surrounded the “Dot.com” companies – many of which had no earnings but huge prices (trading on dreams and hopes, and the illusion that we had moved into a totally new and different “economic age”. That illusion never works out well!

Graph above: note that the correction indicated by the arrows was just over 19%.
As I identified key global tech companies that matured during the 1990’s, I wanted desperately to add Apple (AAPL), just because we have grown accustomed to AAPL being “front of mind” in technology. Fortunately, I did my homework. Succumbing to my initial impulse could not have been more mistaken. Look at this comparative graph, with CSCO is brown, INTC in light green, and MSFT in light blue.  In stark contrast, squint your eyes and see the dotted lines at chart bottom that represents AAPL!!

II) (1982-87) REAGAN/VOLCKER RALLY

Paul Volcker was a prototype for the emergence of the Federal Reserve Chair position as a central hub around which (at least in part) the economy and markets move. Volcker “conquered” inflation (as high as 13.58% for 1980), while Ronald Reagan brought lower tax rates and policies that encouraged business growth. Volcker’s progress in lowering rates prompted a Salomon Brothers (acquired by Travelers in 1997) economist, Henry Kaufman, to “declare” that rates were beginning a long-term decline (back in the day when folks actually paid attention to brokerage economists). He proved prescient, since the “great bond bull market” we have enjoyed for decades started back then!)

III) (2009-2013) THE BERNANKE BOOST

Well, OK, there are lots of descriptions you could use for this market (some of them unprintable). But who can really quibble with the notion that, within a world economy that suffers from below average (anemic) growth, widespread unemployment, and unprecedented sovereign debt, and within which national budget deficits (rather than surpluses) are the “rule” instead of the exception – to what else can we attribute a steady rise in stock market prices (even from atrociously low levels)? Benjamin Bernanke did not invent “monetary easing”, but his several bold “escalations” of easing have lifted the U.S. economy (picture money as though it is water in a lake; as the water level rises, the boats are lifted).  These days, when Bernanke speaks, it feels as though the markets are “listening” more intently than when a national head of state speaks.  He has also provided immense “political cover” for other central banks (EUB, BOE, BOJ) to engage in mega doses of monetary easing.  (See the earlier graph).

There you have your rearview mirror look back at the past 45 years of Dow Jones Industrial Average performance history, and a summary of how our current market “stacks up” relative to the others. There is just one other set of graphs that I want to share with you because one day of market history within this period stands out head and shoulders above all others: October 19, 1987.  It is still called “Black Monday”. Take a look (left) at what happened that day:

Graph to the left:[7] the line that resembles falling off a cliff is a one-day 23% collapse in the market. In terms of magnitude, no other one-day decline comes close to October 19th! I share this because so many investors did not live through it, and might still find it hard to imagine.

Trust me, that decline was all too real. Here is an interesting graph summarizing the events leading to that crash: [8]

That crash is the very thing that set up the market for its next up-move (1987-1990), which took sixth place in our ranking.

Feel free to look at the other graphs (below) of several of these market moves.

INVESTOR TAKEAWAY: Never let the ecstasy or agony of the daily moves in the market make you lose your longer-term perspective on the market! Yes, we go down (sometimes way down). However, if we learn (and live by) an investing discipline that depends upon rules and a longer-term plan (instead of emotions) and patience (with some faith thrown in) history demonstrates that we can manage and prosper.  In fact, that is a chief reason for the existence of MarketTamer – to help you in your journey toward personal growth and investment success!

Disclosure: the author lived through all 45 years (I started trading while in diapers, of course). He has owned many iterations of Dow Jones Industrial Index funds in the past, as well as INTC, MSFT, MSFT, and AAPL. However, nothing in this report is intended to be a recommendation to buy or sell anything! Finally, the “bull market” graphs (below) were produced by the author, using data downloaded from the St. Louis Fed.

[1] http://research.stlouisfed.org/fred2/series/DJIA/downloaddata
[2] From the March 8th midday low of 6,469.95, the move upward was over 140%.
[3]
Funds flow data comes from ConvergEx Group.
[4]
Downloading the price data from the St. Louis Federal Reserve website into Excel
[5]
The “number of days” is counted in calendar days rather than trading days.
[6] I prefer using the 3/8/09 low of 6,469.95, resulting in a gain of 140.6%; but I bow to the need to be consistent and use “low closing price”
[7] From https://en.wikipedia.org/wiki/Black_Monday_(1987)
[8] From https://en.wikipedia.org/wiki/Black_Monday_(1987)


Be Sociable, Share!

Related Posts

 

MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.


This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.


The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.


The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.