Confidence still wanting despite one-year rally
They certainly didn’t ring a bell at the bottom.
One year ago today, the world’s banking system still looked shaky and unemployment had passed 8 percent. Anyone predicting an end to the recession was viewed as a cockeyed optimist.
For stock market investors, though, that was as bad as it got. Since the market hit bottom on March 9, 2009, the Standard & Poor’s index is up 68 percent.
What happened to reignite investors’ optimism? Nothing much, except that the world didn’t end. After the collapse of Lehman Brothers, and the bailouts of other financial giants like Fannie Mae, Merrill Lynch and American International Group, people started talking about a repeat of the 1930s.
The worry was that more banks would close, businesses would fail for lack of credit and scared consumers would stop buying everything but the barest necessities. All of those things did happen, to some extent.
But the Federal Reserve also pumped an unprecedented amount of liquidity into the economy. Banks were propped up by the Troubled Asset Relief Program. The new administration of President Barack Obama pushed its stimulus plan through Congress.
Gradually, smart investors began to think that the worst might not happen. Their fear of a further collapse was outweighed by their glee over being able to buy solid companies at bargain prices.
IBM and Johnson & Johnson had fallen 35 percent in just a few months. JPMorgan Chase, a big bank that came through the crisis with less damage than its competitors, had been knocked down 68 percent. All three are now near their old highs.
The rapid runup, however, makes some investors nervous. With unemployment stuck near 10 percent, they think the market’s momentum has taken it too far, too fast.
In late January, when Greece’s debt crisis hit the headlines, the market seemed to be headed for a significant correction. The S&P 500 fell 8 percent in three weeks, but then it regained its footing. The index is now ahead 2.1 percent since the beginning of the year.
Gerry Sparrow, manager of Sparrow Growth Fund, is one who thinks the market can still climb higher. “Valuations are attractive right now,” he said, “and most (earnings) surprises coming out of the fourth quarter of last year have been positive.”
JPMorgan is among the holdings of his fund, which is based in Creve Coeur, and Sparrow says he’s not worried about the constant drumbeat of news about troubled banks. “It’s emotionally not soothing to hear, but that’s a sign of the bottom,” Sparrow says. “The ones that are left should have less competition, because there’s been a lot of capacity shrinkage in the financial industry.”
Carl Enloe, a veteran adviser at Monetary Management Group in west St. Louis County, takes comfort in market history. “When you are coming out of a bear market and you get a strong year like we’ve had, the second year is usually decent, too,” he said.
Enloe senses a high degree of worry among investors, as evidenced by the reaction to the Greek debt problem. In a contrarian way, though, he reads that as a good sign.
“When everyone is concerned, the market probably is not going to turn over and die,” he says.
Only when people are too optimistic does the market set itself up for a fall. Most of us, even after a 12-month gain that looks spectacular on paper, haven’t turned the corner to optimism just yet.
