The Stock Market Drama Continues...Part 2

As seen in Paragon's 1 Quarter 2009 Print Newsletter
Written by Dave Young, President of Paragon Wealth Management

photo by nicknbecka

POLITICS

In stark contrast to his popularity with the general public, a recent Wall Street Journal poll of top Economists gave the president an “F” grade for his performance so far. Every day Obama introduces a new program, makes an appearance on television, and there is news from Washington that affect the markets.

According to the metrics we follow, the selloff in October should have marked the bottom of this bear market.

I believe this bear market would have ended last October if it weren't for the perpetual bad news from Washington.

To recap:

· After the election the market sold off hard and hit new lows on November 20 because of investor fears surrounding a new administration.

· As rumors swirled that Obama would govern from the center and not the left, the market rallied up until the first week of January. Hopes were high that the Obama administration would quickly provide a comprehensive solution.

· The market dropped 4% on inauguration day, which is the most it has ever dropped.

· Obama appeared on TV every day and repeatedly used words such as crisis, catastrophe and Great Depression. Traders began to sell the market short during each TV appearance.

· On February 10, the new Treasury Secretary gave a highly anticipated speech about the administration's new plan to save the banks. The speech was not what the market hoped for or expected, and once again the market sold down to new lows.

· Next, the White House and Congress worked together to jam a $787 billion “stimulus” package (the largest ever) through Congress in four days. Investors were initially optimistic about a stimulus package until they realized it was comprised of one third legitimate stimulus and two thirds social programs. This caused investors to sell stocks again.

· The stimulus bill was followed by a $410 billion omnibus spending bill.

· That was followed by a gigantic proposed budget that will double the national deficit in five years and triple it in 10.

In summary, Obama's enormous spending plans, proposed tax increases, and lack of focus on the economy caused the market to drop 25% from January 1 to March 9.

WHY BE OPTIMISTIC?

Once you hit a certain point you run out of sellers and there is nothing left to bring the market further down. It appears we may have hit that low point on March 9.

The market was down 54% from its peak at that point, and it appeared as though everything negative had been factored in, maybe several times over. With confidence completely destroyed high yield bond portfolios default rates are projected at double what they were during the Great Depression. Another metric shows consumer spending at the same level it would be if unemployment were 30%. (It's actually 8.5%)

Looking forward, not backward, things actually look pretty good.

Imagine you were asleep the past 18 months and just woke up. This is what you would find:

· Six of our eight “bull watch” indicators support the case for a new bull market.

· Six of the 10 leading economic indicators were up in February.

· Housing is more affordable and mortgage rates are lower than they have been for some time.

· Energy is more affordable for consumers and businesses.

· Credit is loosening, and interest rates are extremely low.

· There will be massive global government stimulus forthcoming.

· Abundant amounts of investor cash is on the sidelines.

· This has been called “the sale of the century.” In inflation-adjusted terms, the Dow Industrials it is at that same level it was 43 years ago. In 1966 we didn't have PCs, Internet and our work force was half the size of what it is today.

· Four fifths of top economists in the latest Wall Street Journal survey said now is a good time to buy stocks.

· Investor sentiment has reached negative extremes and started to reverse.

GOING FORWARD

We are holding a significant amount of cash equivalents in our conservative portfolios, and are waiting for tape confirmation that this market has turned before we are fully invested. We are fully invested in our growth portfolios in the areas of the market that have historically performed the best after a bear market. After the 2000-2002 bear market we were close to doubling the return of the market averages by positioning our portfolios in the best places.

As I've mentioned before, this is the 34^th bear market in the past 100 years. The future always looks bleak when the bear market is the worst, and people become irrationally pessimistic.

That is when the naysayers have their day of fame. The media loves to cover them. They always expect things to get worse, and attract a lot of followers.

They have been wrong every time. Not wrong once or twice, but the past 34 times.

Our economic system is very resilient. Our markets and economy have always recovered from difficult times in the past. We've made it through recessions, world wars, a civil war and a depression. I believe in the free market system.

Our market and economy will recover again, in spite of our politicians.