Market parties despite Washington's gloom
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."
Frequently Asked Questions about this Article…
The article explains that despite gloomy economic indicators and political risks, the sharemarket has been rising — for example, the S&P 500 has climbed strongly since March 2009. Veteran strategist Laszlo Birinyi argues the market itself often knows more than pundits, so investors have been buying stocks based on market signals even while economic worries persist.
According to the article, the S&P 500 had risen 125% since March 2009, and during the year in question it hadn’t fallen for a single week — a sign of unusually steady upward momentum reported at the time.
Laszlo Birinyi is a veteran market strategist and president of Birinyi Associates. In the article he says he focuses on market signals rather than political 'cosmic' issues. He views the market as still in a bull phase, estimating the bull market likely had between one and three years to run, though he can’t precisely time its end.
The article outlines four stages Birinyi attributes to long bull markets: 1) reluctance (early gains go largely unnoticed), 2) consolidation (markets pause and build), 3) grudging acceptance (more investors come back in), and 4) exuberance (widespread optimism and heavy participation).
Exuberance is when optimism becomes widespread and people assume the economy won’t fall into recession. The article cautions that exuberance can turn irrational — that’s the point to be most careful. Birinyi says that while exuberance has appeared, the fully irrational widespread phase — when inexperienced traders flood the market — hadn’t yet arrived at the time of the article.
The article points to political discord in Washington — notably the possibility of $US1.2 trillion in automatic government spending cuts — as an ominous development that could hurt an already lacklustre economy. Strategists face a quandary weighing those political risks against the market’s upward trend.
Birinyi’s firm reported that in January there were net inflows of about $US15.6 billion into S&P 500 stocks, compared with a net outflow of $US10.4 billion in October. That shift from outflows to inflows suggests growing investor confidence and greater demand for stocks during the rally described in the article.
The article conveys Birinyi’s approach: pay attention to what the market is actually signaling (the ticker and money flows) while staying aware of economic and political risks. In plain terms, acknowledge the market’s strength but remain mindful that political decisions or worsening economic indicators could change the trend.
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