Who among us really takes this 60% rally in equity prices seriously?
Certainly not the millions of investors who fled to insured investment products and CDs over the last 12 months.
Yet the stock market is finding it is really difficult to sustain any meaningful sell-off. Some of the smarter skeptics are quick to point out that stocks haven't vaulted this high at this kind of six-month breakneck pace since, well, 1933. "Any more questions?" they ask.
What is more remarkable is the growing number of observers who are increasingly convinced that the rebound is for real. Normally sober, often vinegary sages ranging from Byron Wien to Barton Biggs to Steve Leuthold to Michael Price think that a market which stubbornly refuses to correct its deviant behavior by more than a few percentage points it is trying to tell us something.
Leuthold, who thinks the S&P 500 could reach 1,250 by next year's first quarter, urged investors in his long-short Grizzly Fund to liquidate last March, and he hasn't changed his tune. Like Wien, he even believes the nation's retailers might enjoy a surprisingly strong Christmas season, even if consumer spending remains muted. Price recently told Bloomberg News the economy could be entering a period similar to the 1975-1982 era, when many investors managed to prosper despite nasty inflation.
Speaking at the annual Schwab Impact conference on September 15, the firm's chief market strategist, Liz Ann Sonders, gave attendees a compelling case for continued optimism. People are underestimating "the bounce-back effect," she said.
One troublesome fact is that since September 2001, U.S. economic growth has been fueled largely by government spending, with a big assist from the housing boom in the middle of the decade. It shows no signs of abating and this could spell more bad news for economic growth and strong financial markets than ever, skeptics charge.
However, Sonders now believes exports are starting to rise sharply, adding that it is reaching the point where "GDP can rise even without an increase in consumer spending." If there is to be a real recovery, that trend must be sustained, since all signs indicate that the secular expansion of consumer spending appears to be over for a generation.
No red flag is causing more concern these days than the massive increase in government spending and the federal budget deficit. It remains the elephant in the living room, but in a recent report Leuthold notes that in the last three months estimates of the fiscal year 2009 deficit have fallen 25% from $2 trillion to $1.6 trillion. Unfortunately, that rate of decline is unlikely to continue, but consumers are deleveraging.
In her presentation, Sonders displayed two charts simultaneously-one showing the spike in federal debt and the other showing a huge, vertiginous drop in net household liabilities. The latter was triggered by a reversal of the home equity borrowing binge, which led to a dramatic reduction in mortgage debt. While it exacerbated the extent of the contraction in early 2009, Sonders believes it could create "a healthy path" going forward.