While there is still plenty of time for the bears to get their act together, so far at least, the month of September has made the doom-and-gloomers feel more than a little silly. As of Friday’s close, the S&P 500 finds itself up +4.67% for the month while the Dow sports a gain of +3.41%, the NASDAQ is up +6.16%, and the Russell 2000 has enjoyed an advance of +8.01%.
What must be truly maddening to our furry friends is this was supposed to be their time. History (and the Stock Trader’s Almanac) shows plainly that September and October are the worst two months of the year for the stock market. And with last year’s debacle still fresh in the minds of investors, those in the bear camp probably came into the month licking their chops.
But a funny thing happened on the way to the correction so far this month. It seems that better earnings guidance and some hope that corporate America might (and we’d like to stress the use of the word ‘might’) see some top line growth in the upcoming earnings season has turned the tables on the bears. In English, what we’re saying is that while ‘cost cutting’ was widely attributed for second quarter earnings coming in above expectations, the current whisper on the street is that we might actually see some, dare I say it, revenue growth out of companies in the current quarter.
Please understand that we are not expressing an opinion on the subject of revenue growth nor are we presenting an argument for such an event. We are by no means experts on assessing the earnings outlook for 500 different companies. No, our job, as we’ve mentioned a time or three, is to make sure we understand what is driving the market at any given time. So, with a great many investors scratching their heads over why the stock market has gone straight up during what is supposed to be a miserable month, we thought it would be a good idea to make sure everyone understands why the run for the roses is taking place from a near term perspective.
Isn’t That Enough Already?
Speaking of head scratching, in discussions with a handful people recently, the question of why the market continues to head higher usually is the first subject we address. One of the major ‘big-picture’ themes being offered by my friends these days is that stocks shouldn’t be able to head higher because they’ve already run 58% off the low. And as such, the question asked is: Isn’t that enough to discount an economic recovery that is likely to be weak?
After some admonishment for the use of the word ‘should’ (remember, the words ‘should, could, and would’ are never allowed to be used in the business of understanding the machinations of the market) and the usual caveat that Ms. Market can do whatever she darn well pleases, I find myself going back to the big-picture concept of the market being a discounting mechanism to make my points.
While my views are merely my own and could very easily be flawed, I’ve created some very rudimentary charts to illustrate my view of the world. From my perspective, if you can understand what the market is doing from a big-picture standpoint, it tends to cause much less consternation when things don’t go as expected in the near-term.
The month of September is a perfect example of this point. Most everybody on the planet will agree that stocks are overbought and due for a pullback. Yet, stocks have shown no interest in “correcting” and have simply marched higher. As we pointed out earlier, we believe that this is occurring because (1) some earnings guidance that has been better than expected, (2) growing expectations that we might start seeing revenue growth from companies in the near future, and (3) performance anxiety among fund managers charged with keeping up with the Joneses (er, the S&P 500).
While this near-term explanation may (or may not) make sense to some, it doesn’t necessarily explain the big-picture issue of stocks charging higher to the tune of 58% in just 6 months, which, I’m told, is the fastest rate of advance since the 1930’s.
The Game of Discounting
The point that my less-than upbeat colleagues like to make is that stocks are becoming delusional about the future and that "enough is enough already" in terms of the 58% jaunt to the upside.
