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Market parties despite Washington's gloom

18 Feb 2013 THE AGE - JEFF SOMMER ECONOMY


THE economy may be lurching into another crisis, but you wouldn't know it from the sharemarket, where an epic party is under way.

Since March 2009, the S&P 500-stock index has risen 125 per cent. This year, the S&P 500 hasn't fallen for even a single week.

Irrationally or not, some investors who were on the sidelines have become emboldened enough by the rally to start buying stocks.

Yet this effervescence belies some ominous developments in politics and the economy. After the State of the Union address by President Barack Obama on Tuesday — and the negative reaction to it among many Republicans in Congress — it seemed quite possible that $US1.2 trillion ($A1.1 trillion) in automatic government spending cuts might begin in just a few weeks, delivering yet another blow to an already lacklustre economy.

These apparently conflicting pictures pose a quandary for market strategists. Which signals should an investor emphasise: the signs of disharmony in Washington and the negative indicators for the economy, or the upward trend of the sharemarket?

For Laszlo Birinyi, the veteran strategist and longtime market bull, the contest isn't close. He says he starts by assuming that the market is smarter than any analyst.

"We focus on the market itself, on what it is actually telling us," he said. "We don't worry about the cosmic issues that a lot of people get concerned about. We worry about the stock market ticker. And it's telling us the market is going up."

In September 2009, when very few strategists were overtly bullish, Birinyi, president of Birinyi Associates, the sharemarket research firm, told me that we were in the early stages of a classic bull market. That analysis was prescient. The S&P 500 has returned more than 50 per cent since then.

He said last week we were in the final stage of that bull market. "The bull market probably has between a year and three years to go," he said. "I can't time it. I can only point out the trend."

The firm's calculations indicate that in January, net money flows into the stocks of the S&P 500 — as opposed to money flowing into mutual funds — amounted to $US15.6 billion. This compares with a net outflow of $US10.4 billion in October, just before market sentiment began to change.

Based on the history of long bull markets, such upswings usually have four stages, Birinyi said. They begin with reluctance, shift to consolidation and then move to "grudging acceptance". The last phase, which he says we have just entered, is exuberance: "This is a point where people say, yes, the economy isn't going into recession right away, companies are making money, interest rates are not going through the roof, and all the concerns we have had for some time perhaps were too negative."

When this exuberance turns irrational and becomes widespread — when fear is gone and people with no skill in day-trading gleefully engage in it — it's time to run, but that time hasn't come yet, he said. "There are still problems in the economy," he said. "People are still concerned."