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History Hints that Current Stock Market Rally May Be the Leading Edge of a New Bull Market

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

If history is our guide, then the rally we’ve seen in U.S. stocks in recent weeks is more than just a periodic run-up in share prices – it’s the initial stage of a prolonged bull market.

The 13-week rally the Dow Jones Industrial Average has experienced off its March lows is the most powerful surge that index has seen since the Great Depression. If we look to history, stocks should continue to rally over the next three months.

“I say this with the utmost confidence and my fingers tightly crossed: This is the start of a new bull run,” Hugh Johnson, chairman of Johnson Illington Advisors, told MarketWatch.com.

The 13-week stretch from March 9 through May 29, which saw the Dow soar 28.3%, has been bested only once – by the 40.8% run-up the Dow enjoyed in the 13 weeks that followed its hitting a bottom in May 1932. The Dow surged an additional 3.1% last week.

Going back to 1900 – in any given quarter (13 weeks) – there have been 18 cases in which the market surged 20% or more, Johnson said.

Looking at the trends, the odds are strong that the Dow will be higher three weeks from now, and that means the odds are strong that the index will be higher three months from now.

“Based on history, who knows where we’re going to be four weeks from now? But in 12 weeks, the odds are we’ll be 3.8% higher,” Johnson said.
That can’t be guaranteed, however, since there has been at least case where stocks had a huge quarter, only to plunge afterward: In May 1929, the Dow zoomed 26% in 13 weeks – only to plunge 38.9% in the 12 weeks that followed.

Market Matters

General Motors Corp. (OTC: GMGMQ) officially filed for Chapter 11 bankruptcy protection and another U.S. icon has been laid to rest (until the “new” GM emerges better than ever).  With another $30 billion in government aid in hand, GM quickly moved forward by financing the acquisition of supplier Delphi Corp. (OTC: DPHIQ) by a buyout firm that will help it emerge from its own bankruptcy; reaching an agreement to sell Saturn to Penske Automotive Group Inc. (NYSE: PAG); and entering into a deal to unload Hummer to China’s Sichuan Tengzhong Heavy Industrial Machinery Corp. (though regulatory “challenges” are sure to hold up that one).  Meanwhile, Chrysler LLC progressed with its own restructuring Fiat SpA (OTC ADR: FIATY), much to the chagrin of about 800 dealers; and Ford Motor Co. (NYSE: F) plans to increase production to take advantage of the misfortunes of its primary competitors. 

Shifting to a more “stable” industry, the Federal Deposit Insurance Corp. and FDIC Chairman Sheila Bair seem to be targeting Citigroup Inc. (NYSE: C) for a management shake-up, a move that could give regulators greater control of the one-time financial behemoth.  Smith Barney brokers found their new homes as a significant joint venture between Citi and Morgan Stanley (NYSE: MS) was completed.  Citi also attempted to save face from the prior American International Group Inc. (NYSE: AIG) embarrassment by announcing plans to withhold millions in previously promised severance packages to former execs. On the Troubled Asset Relief Program (TARP) front, JPMorgan Chase & Co. (NYSE: JPM), Morgan Stanley, and American Express Co. (NYSE: AXP) each revealed plans for stock offerings as they race to become the first major bank to repay “bailout” moneys.  With GM now in bankruptcy and Citi struggling to overcome its own problems, the Dow Jones Industrial Average is replacing them with Cisco Systems Inc. (Nasdaq: CSCO) and The Travelers Cos. Inc. (NYSE: TRV) effective June 8.

Energy prices resumed their higher trek, as crude spiked above $70 a barrel for the first time since last October, despite reports that showed demand at its lowest level in 10 years.  Goldman Sachs Group Inc. (NYSE: GS) analysts upwardly revised their projections for future global demand and warned of a “likely return to energy shortages” in 2010.  As gas prices have skyrocketed about 50 cents above last month’s levels, consumers are facing pressures at the pumps that threaten to hinder some of next year’s anticipated growth in the economy.

Market/ Index

Year Close (2008)

Qtr Close (03/31/09)

Previous Week
(05/29/09)

Current Week
(06/05/09)

YTD Change

Dow Jones Industrial

8,776.39

7,608.92

8,500.33

8,763.13

-0.15%

NASDAQ

1,577.03

1,528.59

1,774.33

1,849.42

+17.27%

S&P 500

903.25

797.87

919.14

940.09

+4.08%

Russell 2000

499.45

422.75

501.58

530.36

+6.19%

Global Dow

1526.21

1347.38

1,653.06

1,680.43

+10.10%

Fed Funds

0.25%

0.25%

0.25%

0.25%

0 bps

10 yr Treasury (Yield)

2.24%

2.68%

3.47%

3.86%

-162 bps

 Economically Speaking

It looks like fixed-income traders are not the only ones concerned about the expanding debt position in this country.  U.S. Federal Reserve Chairman Ben S. Bernanke warned that the government “can’t borrow indefinitely” and politicos need to take crucial steps to reduce a budget deficit that is rapidly approaching $2 trillion.   Bernanke again confirmed his belief that the economy will move beyond recession by late 2009, though he also warned that the weak jobs market (among other conditions) will restrict future expansion. 

Speaking of labor, the unemployment data highlighted the week’s releases and the jobless rate surged to 9.4%, a new 25-year high, as 345,000 nonfarm jobs were lost from the economy.  However, even bad news becomes good news these days as economists had predicted a far more substantial loss (525,000 jobs), and the May decline was the smallest since October 2008.  Still, more than six million folks have seen their jobs disappear since the recession began in December 2007 and May represents the seventeenth consecutive month of labor contraction. 

In other news, the manufacturing sector appears to be on the verge of recovery (though ever-so-slightly) as the ISM index reported its best showing since September 2008.  On the housing front, construction spending jumped for the second straight month and pending home sales experienced its biggest increase in eight years.  Personal income surprisingly rose in April, a positive sign for future consumer activity.  Though retailers reported weaker-than-expected same-store sales for May, analysts were quick to point out that Wal-Mart Stores Inc. (NYSE: WMT) is no longer participating in these reports, a decision that should skew the numbers lower because the world’s largest retailer accounts for about 10% of total retail sales.  Luxury chains and department stores were among the worst performers last month, while The Gap Inc. (NYSE: GPS) benefited from a nice increase in activity at its Old Navy chain.

U.S. Treasury Secretary Timothy Geithner ventured over to China during the week where he praised it leaders for past stimulus measures (a tad different tact than used by his predecessor).  Recently, China has complained about the ballooning U.S. debt and analysts remain worried about its continued participation in our Treasury auctions.  The domestic powers-that-be have long criticized China about unfair trade practices and currency issues.

While the respective leaders have reservations about each other’s policies, Geithner’s remarks may be seen as smoothing over relations as our combined efforts will be imperative to securing an effective and long-lasting global recovery.  

Weekly Economic Calendar

Date

Release

Comments

June 1

Personal Income/Spending (04/09)

Income increased; savings rate highest in 50 years

 

ISM – Manu – (05/09)

Stronger than expected showing

 

Construction Spending (04/09)

Surprising rise for 2nd straight month

June 3

Factory Orders (04/09)

Increase in orders, though lower than anticipated

 

ISM – Services (05/09)

8th straight monthly contraction

June 4

Initial Jobless Claims (05/30/09)

Total claims fell for first time in 2009

June 5

Unemployment Rate (05/09)

Climbed to 9.4%, a new 25-year high

 

Non-farm Payroll (05/09)

345k decline in jobs not as bad as expected

 

Consumer Credit (04/09)

2nd largest drop in borrowing on record

The Week Ahead

 

 

June 10

Balance of Trade (04/09)

 

 

Fed Beige Book

 

June 11

Retail Sales (05/09)

 

 

Initial Jobless Claims (06/06/09)

 

News and Related Story Links:

June 8th, 2009

Why Gold Will Surpass $2,500

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This entry was posted on Monday, June 8th, 2009 at 10:30 am and is filed under Main Essay, William Patalon III. You can follow any responses to this entry through the RSS 2.0 feed. Due to the amount of comments we receive Money Morning will not be able to respond to all questions. If you have not already registered to leave a comment, once doing so you will receive Money Morning's Daily Email.

There Are 6 Responses So Far. »

  1. Comment by Larry Kovar on 8 June 2009:

    I like how you included the market recap in your article ( the columns).

  2. Comment by A.M. Deist on 8 June 2009:

    “With GM now in bankruptcy and Citi struggling to overcome its own problems, the Dow Jones Industrial Average is replacing them with Cisco Systems Inc. (Nasdaq: CSCO) and The Travelers Cos. Inc. (NYSE: TRV) effective June 8.” How easily we can deceive ourselves into making the dow move higher. All we have to do is change the mix to companies that do well in bad economies. Its like the family that gets a new credit card that has no charges and claims their finances are in better shape because they have less debt per credit card than they did the week before, or the guy who eats a hamburger, fries and a milk shake every lunch and when the doctor tells him to go on a diet he eats a hamburger, fries, a milk shake and a salad and thinks he is on a diet. We can tell ourselves over and over that everything is great, as has MSNBC done the past year, but that doesn’t change reality, does it?

  3. Comment by Captain Bob on 8 June 2009:

    How many of those historical bull market rallies were accompanied by government spending (and requisite borrowing) on the same scale as our past and current administrations have orchestrated over the last 9 months?

  4. Comment by David H. on 20 June 2009:

    I couldn’t disagree with your analysis more. This economy has been through one crippling disaster after another from losing the Shadow Banking system to the banks getting crushed, the housing market is in total disarray, unemployment is at 9.4% and headed higher, the auto industry has collapsed and the list goes on. If you think this is going to be a simple V shaped recovery I think you are missing the boat. Your own article states: “In May 1929, the Dow zoomed 26% in 13 weeks – only to plunge 38.9% in the 12 weeks that followed.” I think that is much more likely to happen. One of the key indicators I look at is the capacity being used by the Rail Roads to ship goods around the US. 40% of goods are shipped this way and shipments are down 25% in May 2009. Not to mention what Obama is doing to the Dollar and the US Debt, with China and Russia purchasing fewer GVT bonds and talking about getting off the US dollar as the global reserve currency. I think you’re being overly optimistic and a W shaped recovery is much more likely, like the Great Depression you mentioned earlier. The bottom line is we’re not getting out of this mess that easy!!!

  5. Pingback by Another Dismal Earnings Season for U.S. Companies? on 6 July 2009:

    [...] for bargains, the euphoria fizzled out over the past few weeks as many began to sense that the rally had moved too much too quickly (and the economy still has many issues yet to resolve).  Financials, energy, and basic [...]

  6. Comment by JP on 24 July 2009:

    I appreciate your article. It was the first one so far this year that was confidently bullish. I agree with you and I have been strongly bullish for a month or so now. The main source of my confidence in the health of this market is the overwhelmingly pessimistic sentiment of analyst and investors. This means that there is still a lot of money that has yet to enter the market and it has a long way to go. In regards to the increasingly negative economic data such as unemployment, I recognize that the stock market is a leading rather than lagging indicator of such figures. It only further strengthens investor’s pessimism, making the market even stronger. I admire that you were bold enough to be contrary to the majority, which, I believe, is why your opinion will play out. On a final note, it is when I start to see more publications like this one (bullish), that is when I will pull my money out in anticipation of this bull market’s first correction. Once everyone declares that the rally was after all just a rally, that’s when I’ll go long again. It should be amusing to see how many people stay bearish too long which is indicated by the sometimes vehement opposition to bullish forecasts such as yours. Thanks and good luck.

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