U.S. Markets closed

This Rally Is in Its Infancy

Yahoo! Finance
The Exchange

By Andrew S. Parlin

There are two decidedly different ways to look at the market’s rally.

The first one invites caution. From its March 2009 low nearly four years ago, the S&P 500 has compounded at a spectacular annual rate of 24%. Against the backdrop of a long list of “overbought” signals, a cloudy earnings picture, and an economic recovery that appears to be struggling, why not bail? After all, this has been one heck of a good run.

The other way to think about the market is to study its progression since WWII and note that the two very long secular rallies (1942-1968 and 1982-2000) were punctuated by two periods where the market took a very long time to advance to new highs (1968-1982 and 2000-?). This approach would acknowledge that markets may well be extended on a short-term basis. But it would also beg the question whether we may at last be coming to the end of one of those protracted periods of going nowhere.

At the Inflection Point

During the 14-year period from 1968 until the summer of 1982 the market did anything but move sideways, yet it was well capped on the upside throughout the entire period save for a brief fake-out in late 1980. It then broke out furiously beginning in mid-August 1982 as the market recognized that the long hard battle against inflation had finally been won. Similarly, today, the market may well be signaling that Bernanke is winning one of the most obstinate battles of disinflation since that Great Depression. Perhaps the long nose of the market is sniffing out a pickup in GDP growth and a return to more normal times. This would include a healthy inflation cushion of 2.5-3%.

Markets do indeed appear to be at an inflection point. We seem to be leaving the post-crisis era of what might best be called the “reluctant rally” of 2009-2012 and entering into a new phase marked by a structural shift in asset allocation preference and even a healthy return of greed.

Credit the Fed

What is the basis for such optimism? After all, didn’t GDP contract slightly in the fourth quarter? While it is true that growth has been disappointing, the headwinds that have restrained GDP are abating. The big macro uncertainties of Europe and China have receded dramatically. At the same time, with each passing month we get closer to greater clarity on how the fiscal cliff standoff will play out. Even a bad deal will at least remove the scary nature of a big unknown. The diminishing risk of fat tails will allow the cumulative impact of negative real interest rates to gain traction.

Quantitative easing is working. It has kick-started a recovery in housing and autos, traditionally the two key leading sectors of recovery. It has also led to extremely buoyant conditions in credit markets, a boon to medium-sized businesses. What few investors have realized is that the Bernanke game plan is meeting with tangible success. This explains the market’s extraordinary resilience. But whereas QE1 and QE2 were crisis-fighting policies, QE3 was designed as a proactive, outcome-based program. The desired outcome? An unemployment rate of less than 6.5% (versus today’s 7.8%).

This Is Not a Bubble

Only a much faster rate of economic growth can drive unemployment down to that level. The sequencing is really quite simple. Keep rates across the whole maturity spectrum low enough for long enough and capital markets are lifted above a critical threshold. What is that critical threshold? The point at which financial conditions become so benign that they awaken good old animal spirits in the real economy.

While some dismiss Fed policy as creating the next bubble in credit markets, this is a misuse of the word bubble. A bubble describes an excess that eventually self-destructs. This, in contrast, is a healthy tonic for a very fragile economy. It is the only pathway out of a long-lasting liquidity trap. Just ask the Japanese about whether liquidity traps cure themselves. They don’t. It takes a policy shock. This is exactly what the Fed is delivering. The precondition for a better economy is a powerful and long-lasting rally in stocks and credit, thus driving down the cost of capital for American business.

More to Come

We are reaching a turning point where robust capital markets finally inject optimism into corporate decision marking. Recent activity in M&A is reflective of this. And it suggests that we are on the cusp of a new cycle in private capital spending. All of this points to an improvement in labor markets, better growth in personal income and a sustained improvement in final demand.

The really good news is that Bernanke knows all too well that monetary policy must remain highly accommodative until the economy is without any question on a firm footing. After all, it was the premature withdrawal of monetary stimulus in 1932 that turned a recession into the Great Depression. We are a long way from the next tightening cycle, particularly given a very large output gap and the contractionary impulses that are about to come from higher taxes and smaller public sector outlays.

Rarely do central bankers keep such forceful monetary stimulus in place well into an economic expansion. But this is the unusual dynamic at work today. It is nirvana for stocks, which is why the 128% advance off the 2009 lows should be viewed as little more than a return to baseline. The next big secular rally has just begun.

Andrew Parlin is co-founder of Kotell Advisors LLC, an investment company based in New York City

  • Business

    Should I sell my $565,000 duplex and invest the money — or continue to collect rent?

    The main question is whether I would get a better return by selling the duplex and investing the money or by keeping the property and collecting rent. What if the rental is vacant for a period of time?

  • The iPhone X May Be Here to Stay
    Motley Fool

    The iPhone X May Be Here to Stay

    The Apple (NASDAQ: AAPL) supply chain has been rife with rumors that the iPhone maker will end production of its flagship device this year. Noted Apple analyst Ming-Chi Kuo of KGI Securities believes that weak demand for the iPhone X is forcing the company to reduce component orders. Kuo says production of the iPhone X will be halted later this year when the new 2018 models go into production.

  • Litecoin Technical Analysis – Litecoin Fork to Test Support 18/02/2018
    FX Empire

    Litecoin Technical Analysis – Litecoin Fork to Test Support 18/02/2018

    Following a bullish trend through the week, Litecoin has seen a bearish trend form through the early part of this morning, with Litecoin hitting an intraday low $215.03. Litecoin’s first major resistance level sits at $213.6, with Litecoin having fallen through its first 2 resistance levels of $234 and $222 this morning. Having broken resistance levels through the week, this morning has been a day of testing support levels, with Litecoin’s heavily anticipated hard fork this evening in focus through the day.

  • Qualcomm is moving to decide how to price NXP deal to lure in enough shareholders

    Qualcomm is moving to decide how to price NXP deal to lure in enough shareholders

    Qualcomm and its advisors have been working to reassert control over the company's deal to acquire NXP Semiconductors this weekend, by trying to figure out what price will be enough to garner the 80 percent of shares needed to close the deal, sources tell CNBC. On Friday, Qualcomm's advisors at Goldman Sachs began contacting large holders of NXP to ascertain at what price those holders would be willing to sign voting agreements stipulating their support for a deal, according to people familiar with the conversations. While no specific price was offered, Qualcomm's advisors were said to have broached "the low $120's" as a possibility for a deal. This is Qualcomm's first effort in months to see what price large holders of NXP Semi would be willing to accept in order for Qualcomm to close the all cash deal, which is worth more than $40 billion.

  • The 3 Biggest Mistakes Warren Buffett Made With IBM
    Motley Fool

    The 3 Biggest Mistakes Warren Buffett Made With IBM

    Warren Buffett is waving the white flag on IBM (NYSE: IBM). After years of touting the tech titan as one of his best ideas, Buffett ditched nearly all of his stake in the company this past quarter. His holding company Berkshire Hathaway (NYSE: BRK-A)

  • Why General Motors Could Be Leaving Korea for Good
    Motley Fool

    Why General Motors Could Be Leaving Korea for Good

    In recent years, General Motors (NYSE: GM) has posted consistently strong profits in its two largest markets: North America and China. It's seeming increasingly likely that GM will ultimately have to end its manufacturing operations there to achieve this goal. Management first publicly raised the need for restructuring at GM Korea during General Motors' fourth-quarter earnings call earlier this month.

  • Lifestyle

    There’s another option when the answer to ‘can I retire’ is ‘not yet’

    You need to estimate health-care expenses, your lifespan, taxes, future investment returns, interest rates and inflation over decades to make an informed retirement decision. Miscalculation in any of these areas can cause drastically divergent retirement outcomes.

  • Adam Rippon Has Declined NBC's Offer to Work as a Correspondent for the Remainder of the 2018 Olympics

    Adam Rippon Has Declined NBC's Offer to Work as a Correspondent for the Remainder of the 2018 Olympics

    After agreeing to be a correspondent for NBC for the remainder of the PyeongChang Games, breakout star of the Olympics Adam Rippon changed his mind and declined the offer, USA Today reports. Rippon, an openly gay figure skater, turned down the offer after he realized he would need to give up his official Olympic standing, move out of the Olympic village, and not march in the closing ceremony. “I am so flattered that NBC wanted me to work as a correspondent, but if I took this opportunity, I would have to leave the Olympic team and I would have to leave the (Olympic) Village,” Rippon said on NBCSN.

  • Paul Ryan: Deficit increase is due to entitlement spending
    Fox Business Videos

    Paul Ryan: Deficit increase is due to entitlement spending

    House Speaker Ryan talks need to reform health care, breaks down the budget deal that was passed on 'Sunday Morning Futures.'

  • David Tepper's Appaloosa Portfolio Jumped Nearly 50%: 13F

    David Tepper's Appaloosa Portfolio Jumped Nearly 50%: 13F

    Billionaire David Tepper, the head of Appaloosa Management, recently filed his quarterly 13F report. According to the SEC filings, Appaloosa's value increase by almost 50% in the last quarter of 2017. As of the start of 2018, Appaloosa Management's largest holdings were Micron Technology Inc. (MU), Facebook Inc. (FB), and Powershares QQQ Trust (QQQ). $10.5 Billion Portfolio Stocks in Appaloosa's portfolio which were represented on the 13F filings totaled $10.5 billion as of December 31, 2017. The list value for those stocks was up an astonishing 47.5% as compared with the previous quarter, according to Value Walk. By comparison, the S&P 500 was up just over 6% over the same period. At a time

  • Business

    This is how much credit-card debt makes you undatable

    More than 77% of people consider credit-card debt unattractive, according to a survey released Monday by personal-finance site Finder.com. On average, people say $11,525 in credit-card debt is enough of a red flag to swipe left or walk away. Payday loans, which can have astronomical interest rates as high as 400%, are the second most unacceptable forms of debt for daters.

  • Iran Fails To Comply With OPEC Deal

    Iran Fails To Comply With OPEC Deal

    The OPEC Monthly Oil Market Report is out production data for January 2018. All data, unless otherwise noted, is through January 2018 and is in thousand barrels per day. OPEC crude only production has held steady for three months.

  • NVIDIA’s Earnings Report Reveals a Worrying Problem
    Motley Fool

    NVIDIA’s Earnings Report Reveals a Worrying Problem

    The NVIDIA (NASDAQ: NVDA) juggernaut continues to outperform as the graphics card specialist topped Wall Street expectations once again with a terrific showing in the fourth quarter of fiscal 2018. The company reported a steep rise in its revenue and earnings, thanks mainly to a massive year-over-year jump in its data center and gaming businesses. What's more, NVIDIA expects stronger growth in the current quarter, forecasting a 50% year-over-year increase in revenue, while net income could jump close to 82%.

  • Amerisource shares jump on Walgreens buyout report
    Associated Press

    Amerisource shares jump on Walgreens buyout report

    Shares of AmerisourceBergen soared Tuesday on reports that Walgreens is pursuing a complete takeover of the huge drug distributor. The Wall Street Journal reported late Monday that Walgreens Boots Alliance Inc. reached out to AmerisourceBergen Corp. about a potential deal several weeks ago. Walgreens already owns about 26 percent of the company, according to data provider FactSet.

  • Gilead wins reversal of $2.54 billion hepatitis C drug patent verdict

    Gilead wins reversal of $2.54 billion hepatitis C drug patent verdict

    A federal judge in Delaware has overturned a jury's verdict requiring Gilead Sciences Inc to pay a record $2.54 billion because its hepatitis C drugs Sovaldi and Harvoni infringed a patent held by rival Merck & Co Inc. The verdict had been the largest ever in a U.S. patent case but U.S. District Judge Leonard Stark in Wilmington, Delaware, on Friday ruled Merck's patent was invalid. Gilead in a statement on Saturday said it always believed the patent was invalid and was pleased the judge confirmed that opinion. The December 2016 verdict followed a trial in which jurors found that Merck's patent on hepatitis C treatments, which it acquired in 2014 when it bought Idenix Pharmaceuticals, was valid.

  • Business

    Barron's Picks And Pans: GE, Under Armour, Lam Research And More

    This weekend's Barron's cover story offers a look at the prospects for a troubled industrial giant. Other featured articles offer four stock picks for an aging bull market and the prospects for real estate investment trusts as interest rates rise. "General Electric's Dim Prospects" by Andrew Bary examines why the slide in the shares of troubled industrial giant General Electric Company (NYSE: GE) has attracted bargain hunters.

  • Jeff Sessions talks immigration reform and the Mueller probe
    Fox Business Videos

    Jeff Sessions talks immigration reform and the Mueller probe

    Sessions speaks out about the need to eliminate 'lawlessness' in the immigration system and discusses the Russia investigation on 'Sunday Morning Futures.'

  • Washington, D.C., Has Given the Boring Company a Permit for a Possible Hyperloop Station

    Washington, D.C., Has Given the Boring Company a Permit for a Possible Hyperloop Station

    Washington, D.C., has issued a permit allowing Elon Musk's Boring Company to do preparatory and excavation work in what is now a parking lot north of the National Mall. The permit, reported Friday by the Washington Post, was issued way back on November 29th of 2017. The permit is part of an exploratory push by the city's Department of Transportation, which according to a spokesperson is examining the feasibility of digging a Hyperloop network under the city.

  • What to Do With Your 401(k) When the Market Crashes
    Motley Fool

    What to Do With Your 401(k) When the Market Crashes

    Market crashes are scary. After a long bull market in which the S&P repeatedly hit new record highs, it's hard to see the retirement savings that you've worked for years to save in a 401(k) take a severe hit when the good times come to an end. The key to handling volatility is to be smart about risk management, anticipating worst-case scenarios and adjusting your strategy to allow for them.

  • French Olympic Ice Dancer Suffers Serious Wardrobe Malfunction

    French Olympic Ice Dancer Suffers Serious Wardrobe Malfunction

    French ice dancers Guillaume Cizeron and Gabriella Papadakis took second place in Monday’s short program despite a wardrobe malfunction. During the duo’s performance, Papadakis’ costume appeared to unhook from around her neck, exposing her left breast for part of the routine. The malfunction did seem to impair their final score of 81.93, but not enough to stop them from finishing second behind Scott Moir and Tessa Virtue of Canada, who scored 83.67.

  • This Is Warren Buffett’s Top Equity Holding, Surpassing Wells Fargo

    This Is Warren Buffett’s Top Equity Holding, Surpassing Wells Fargo

    Warren Buffett's Inc. has taken a real shine to Inc. Berkshire boosted its holding of the iPhone maker to $28 billion at year-end, surpassing its stake in & Co., which was worth $27.8 billion on Dec. 31. Apple has continued to rally this year, increasing the value of Berkshire's stake to $28.6 billion based on Thursday's closing price.

  • Mueller Deflates President Trump's Claim That Russia Meddling Was Hoax

    Mueller Deflates President Trump's Claim That Russia Meddling Was Hoax

    Donald Trump has insisted for more than a year that Russians didn’t try to get him elected. Special Counsel Robert Mueller put an end to those claims on Friday, declaring definitively that they did. A federal grand jury indicted 13 Russian nationals and a so-called “troll farm” in St. Petersburg on Friday for a broad campaign to sway the 2016 election in Trump’s favor.

  • Delta Air Lines Wants the Boeing "797" ASAP: Here's Why
    Motley Fool

    Delta Air Lines Wants the Boeing "797" ASAP: Here's Why

    Last year, Boeing (NYSE: BA) strained its relationship with U.S. airline giant Delta Air Lines (NYSE: DAL) by attempting to have big tariffs imposed on Delta's purchase of CSeries jets from Bombardier. Many pundits saw Boeing's trade complaint as a risky move that could alienate a key customer -- especially after Delta ordered the Airbus (NASDAQOTH: EADSY) A321neo last December instead of Boeing's 737 MAX 10. Delta isn't going to make bad business decisions just to punish Boeing.

  • Finance

    Wells Fargo auditors could soon deliver another blow to the bank

    Wells Fargo investors have learned a lot about the bank’s worsening issues recently, but they should be watching carefully over the next couple of weeks for possibly more bad news — from the bank’s auditors, KPMG. KPMG must opine on Wells Fargo’s(WFC) internal controls by around March 1, and investors might not like the answer: the very real possibility of an adverse opinion from the auditors identifying material weaknesses in the bank’s controls.

  • The 2018 Flu Season Might Finally Be Leveling Off

    The 2018 Flu Season Might Finally Be Leveling Off

    Health officials on Friday said about 1 of every 13 visits to the doctor last week was for fever, cough and other symptoms of the flu. The Centers for Disease Control and Prevention report said the number of states reporting heavy flu patient traffic also held steady at 43. “I thought I was going to die, I really did,” said Ben Bland, a 39-year-old event planner in Kansas City, Missouri, who was hospitalized this week with pneumonia on top of flu.