Recent Experience V. Logic
A great deal of market movement is a battle between logic and recent experience. During the dot com boom, logic told us that things had gotten out of hand, but recent experience told us that the boom could go on forever. Eventually logic won, but not before recent experience had taught early logic adherents a painful lesson.
I believe that we are now seeing another battle between logic and recent experience. Logic tells us that we should soon see a pretty powerful bull market, but recent experience tells us not to hold our breath. Here are the points logic makes:
1. Except for the great depression, every serious market downturn has been followed by a big rally. Even the great depression was, eventually. It is just that we had a three year bear market, before things turned around. But since then, we have never had a bear market that lasted for much longer than a year.
2. A stimulus package appears to be coming.
3. Larry Summers and Tim Geithner- we've got the A-team in Washington, now.
4. Buy cheap is one half of "buy cheap, sell dear."
5. The market anticipates the economy, and causes changes in the economy. Therefore the market should improve months before the overall economy does.
Recent experience is now the gloomy one, so changed from the ecstatic figure of February, 2000. "All the bear analysts have been right" she says morosely, "And they are still quite bearish." Here are the bear points:
1. The bull analysts said, "Stand Pat" after the market dropped in late September and early October, and they were wrong, wrong, wrong.
2. It is naive to think that Government will get this right and fix things. They'll never get it together to do the right thing. They are just a bunch of loud mouths, out to help themselves.
3. It is naive to think that the banks are curable, and the people will refuse to help them out again. Without lending there is no way the economy will recover.
Yes, the bears have some scary stuff to talk about. But the government has both treasury and fed, and between the two, I believe they will have the resources to save the major banks. And Obama's tough talk on bonuses should give him some leeway. Plus, the stimulus package should slow down the rate of defaults, which is at the core of the banks' problems.