Stocks closed 2008 not with a bang or a whimper but a muffled cry for help, sinking by half a percentage point in a mostly dreary December that saw leadership only from a weary cadre of beaten-down small caps.
Although the month felt relaxed after a harrowing September, October and November, it was very weak compared with most Decembers of the past century. The fact that this barely registered on most investors' pain-o-meters shows how numb they have become to the anguish of losses. This is typical for bear markets, as apathy begins to anesthetize investors' common sense and the erosion of asset values slowly becomes a new kind of normal, with brokerage statements thrown away unopened.
The December result was odd, however, because by all rights stocks should be shooting out the lights now. Sure, there's a recession going on, and earnings estimates are still being revised downward, and unemployment is rising, and the majority of corporate bonds are priced for Depression-era default rates, and foreign consumer demand is weakening, and trust is now just a five-letter word for "sucker."
Yet the great Federal Reserve money giveaway to lenders, and the expected Obama Reconstruction, should already be counterbalancing all the negativity. This is the most telegraphed swing of the bat since Babe Ruth promised to hit a homer into center field in the third game of the 1932 World Series. It should be the most can't-miss trade of all time. So why aren't stocks leaping?
A sure thing -- maybeIf this seems like an odd question, think about it for another minute: It's almost unbelievable that, for once, there is very little uncertainty about what is going to transpire over the next year.
- Watch the video to the right for some 2009 predictions.
We know the new president is going to propose a set of infrastructure-mending, job-creation and tax-rebate bills worth up to $900 billion over two years; we know the Fed is ready to buy every soured loan or mortgage under the sun; and we know a Democratic Congress is going to approve all these cockamamie schemes over the howls of conservatives.
And yet in the face of all this largesse, the major U.S. stock indexes just closed their fourth straight month in the red, a rare event even in bear markets.
The reason that shares of great American industrial giants such as, and can't get off the mat: With borrowing levels and risk appetites at hedge funds way down, there just aren't as many dollars available to buy stocks as there were two years ago, no matter what you might hear about bucks stacked like dry cordwood at brokerages. Plus, there's diminished interest for accumulating the shares of high-growth companies at a time when new federal dollars have not yet been appropriated, the pace of economic activity is still slowing and price-to-earnings multiples are shrinking. And, finally, a frightened "you first" attitude has emerged in which few investors seemingly want to be a hero and lead the way.
Statistically, we can see the market has leveled off recently not because there's a lot of demand for stocks by new buyers but because current holders have stopped selling as much. This is a recipe not for the first leg of a long-term bull market but potentially for the first phase of a cynical but exciting bear market rally that could fitfully take stocks up 30% as investors are mesmerized by the persuasive new American president and start to bet that his fiscal largesse and the Fed's monetary experiments might work to bring an end to the recession by midyear.
You know from my past few columns that I don't expect this to turn out well because the negative force of global deleveraging is likely greater even than the positive forces of government spending. Yet that could be more of a problem for the second half of 2009 than the first half. Looking back on today from the future, I don't want to have to wonder what the heck I was thinking by not taking advantage of a 40% decline in stock values, zero interest rates and the most grinchly public mood in two generations.
As a result, I think it's appropriate to allocate as much as 30% of one's portfolio to stocks for now, with the rest in high-grade corporate and mortgage bonds, commodities and cash. I'd add more to stocks if they break out of their current languor by moving above the 920 level of the S&P 500 Index ($INX) at the end of a week and still more if they break out above 1,050. The rally target would be around 1,215. And all bets are off if the market turns around and sinks below 815.