My attention is not usually focused on predicting where markets will go or what stocks to buy or sell. But today I’ll make an exception, because what we’re seeing is so nakedly obvious. The markets have risen too far, too fast.
Through Monday, the S&P 500 Index is up 22.4% for the last 12 months.
There’s no point in going into how silly that is. Even if you considered the markets undervalued a year ago, they were not that undervalued. The market generally is a predictor of the economy. Based on this rally, we’re about to enter a golden age of full employment and government surpluses.
We’re going to see a Tesla in every garage and a free-range organic chicken on every home rotisserie. And yes, you will be able to afford one.
That’s the bad news, the good news is that the market doesn’t have to correct. It doesn’t have to skid hundreds of points just to get back at a more reasonable level. You know, one that reflects GDP growing at a 2% rate, not 20%.
So what’s the solution? Three things:
First, the housing market has to stabilize. That means banks need to settle their ongoing litigation stemming from the crisis and clean up the foreclosure mess.
Just to give you an idea how far off course they still are: A recent lawsuit against Bank of America Corp. found that the bank was paying employees a $500 bonus to foreclose on clients.
And, of course, that’s just the latest horror story to come out of the housing crisis. After being pressured by regulators, banks ended up giving loan modifications to just 43% of those eligible (another 2% are still waiting). Just 817,000 received temporary or permanent modifications.
That’s not only discouraging, it’s been damaging. For many, home ownership was a financial anchor that allowed them to spend in the economy. Contrast those modification levels with the more than 17 million foreclosures since 2006 and you can see how many lives have been financially devastated — job or no job.
Secondly, companies need to start investing. In the aftermath of the financial crisis we watched as company after company began stockpiling cash “just in case.”
At the end of 2012, U.S. companies had stockpiled more than $1.7 trillion in cash or other liquid assets. They added $40 billion last year and now have $300 billion more in cash than they had at the start of the financial crisis.
Moreover, more than half of the cash, roughly $840 billion at the end of last year, is being held in overseas subsidiaries. That means lawmakers here need to act swiftly to enact a tax amnesty program to return this cash for investment here, rather than abroad.
THE FED TO THE RESCUE
And finally, in order to keep investors in equities, Ben Bernanke’s Federal Reserve needs to keep interest rates low.
Now many of you will argue that this is a bad idea. Cheap money, you say, will only lead to more inflation. It’s a bubble, not unlike the kind of easy credit that got us into this mess in the first place.
Yes, that’s the risk. But the reality is that U.S. interest rates aren’t set in a vacuum. The U.S. central bank competes with central banks around the world. Moreover, the Fed needs to keep in mind that even mentioning “tapering” of its bond-buying program is sending bond investors to the exits.
The Fed has the luxury of time, so why not use it?
Ultimately, the market rally has a sort of overenthusiastic feel to it. But feeling good isn’t necessarily a bad thing. There are a lot of reasons to have bought during the last year.
It’s just that investors have gotten a little ahead of the reality. Should housing and corporate spending improve, and interest rates stay in line with other economies, there will be plenty of reasons to justify the current market levels — and more.
[by David Weidner, writing for MARKETWATCH]
As always, posted for your edification and enlightenment by
NORM ‘n’ AL, Minneapolis