By my reckoning, this leg of the stock market rally began about a week after the presidential elections. The rally overall has been going on much longer. The question everyone is asking is how long it can go on without a major correction.
If one looks back through history, the chances of the S& P 500 Index continuing to move higher without at least a 4% pullback is slim at best. There has been only one year in recent history, 1995, where the market continued higher throughout the year without any kind of significant pull back.
I remember that year well, and there are both similarities and difference between 1995 and today. Back then, U.S. unemployment was below 6%. Today it is 7.5%. The economy was recovering from a mild recession at that time but it was a bumpy ride. GDP fell below 1% for the first two quarters of the year and some worried the economy would slip back into recession.
Corporate profits were rising, whereas today, those profits are already at record highs. China’s economy, like today, was slowing. Commodity prices were dropping, Europe’s economy was moribund at best and this country’s deficit was at a record high (as a percentage of GDP).
Investors had little confidence in their elected officials. Congress was fighting over reducing the budget and other social issues. It was so bad that Congressional Republicans actually shut down the government later in the year. It would be fair to say that the stock market was climbing a wall of worry throughout 1995.
Alan Greenspan, who was running the Federal Reserve Bank at the time, had already engineered a bond market crash by raising interest rates in 1994 in order to head off an expected rebound in inflation. In the spring of 1995, he reversed those policies and began to ease at the same time that the economy was beginning to grow again.
As I have said in the past, history tends to rhyme, if not repeat itself, and the similarities between Fed policies today and those of Alan Greenspan are striking. Like 1995, the U.S. economy is also growing, registering a 2.5% annualized gain in the first quarter while our Fed continues to ease.
The first half of the Nineties had been turbulent and investors were shell-shocked, distrustful of Washington, the Fed, and definitely the credit and equity markets. No one, including yours truly, was prepared for good news and when it came we were skeptical at best. Does any of this sound familiar?
Granted, 1995 was an outlier of a year and nothing says 2013 will be a repeat of that year. But I have often said that the markets will do what is most inconvenient for the most number of investors. Everyone has been warning you that the markets are due for a correction. Heck, I have been saying that off and on since January. The point is that it doesn’t have to happen in May (“sell in May and go away”) or June, July, August, etc. So go ahead and dream about a market that just continues to go up. It probably won’t happen, but what if it did?