This is a syndicated repost published with the permission of Money Morning - Only the News You Can Profit From. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.
At first glance, there can be no doubt that U.S. President Barack Obama has been good for the stock market.
The Standard & Poor’s 500 Index has rallied by nearly 700 points – just shy of 86% – since the president’s first Inauguration on Jan. 20, 2009.
This is the best stock market performance for a presidential first term since World War II, even beating the 79.2% rally during President Bill Clinton’s first term in the White House, from January 1993 to January 1997.
In fact, the only time stocks rallied more during a presidential first term was during Franklin Roosevelt’s first term from March 4, 1933, to Jan. 20, 1937, when the Dow Jones Industrial Average rose 245% off of Depression-era lows.
In a very broad sense, the condition of the stock market at the start of President Obama’s first term in 2009 can be compared to the stock market in 1933. In both cases, stock prices had collapsed and were trading at generational lows when both presidents took office. In both cases, share prices rallied substantially off of the bottom as economic conditions improved.
But all this really proves is that the first leg of any rally is usually the strongest and most profitable.
As the S&P 500 is at a five-year high and is zeroing in on the 1,500 level for the third time in its history, one has to wonder if the Obama Rally is sustainable or are we just reverting to the mean?
Will This Obama Rally Continue?
Looking at a long-term chart of the S&P 500 Index, there is clearly a lot of resistance around the 1,500 level.
The 1,500 mark proved to be the top of the “Tech Bubble” in 2000 and again in 2007 as the U.S. housing market was starting to roll over. In fact, if you were looking at an intraday chart instead of a 15-year chart, you might be thinking about when to put on a short position.
Is there anything different about the 1,500 level in 2013 to make it sustainable – just another milestone on the way to higher share prices – or is the market running at full speed into another brick wall?
To find out, we have to look at the contributions from the U.S. Federal Reserve.
On Dec. 16, 2008, the Federal Open Market Committee cut the federal funds rate to zero, where it has remained ever since. The FOMC has announced that it will keep the fed funds rate at zero until the unemployment rate falls to less than 6.5%.
In addition to zero interest rates, the Fed has embarked on four distinct rounds of quantitative easing, purchasing bonds in the secondary market to boost liquidity.
While these moves are most closely associated with bonds, they have had a profound impact on equity valuations as well.
Josh Brown, vice president of Fusion Analytics, told Yahoo! Finance’s “The Daily Ticker,” “There are 38 countries pursuing a loose money/money-printing strategy…Profit margins are artificially high because, first of all, companies can raise money as if they are sovereigns, number one. Number two, they just lay people off every time the road gets even slightly rocky…Look at the revenue reports, the reports where they beat by a penny, two pennies, they are all light on revenue and they have all made their number thanks to lowered interest expense and, frankly, cost cuts.”
Even in this environment, zero interest rates leave investors scrambling to earn any kind of yield. That is why typically conservative investors continue to buy stocks, junk bonds, commodities, farmland and rental housing in spite of signs that revenues are soft and will ultimately lead to soft earnings, as Brown points out above.
And now the trend has gone global.
“It isn’t just the Fed; the Bank of Japan is now doing more stimulus in cash terms than Bernanke and Japan’s economy’s only one third the size,” Money Morning Global Investing Strategist Martin Hutchinson said.
“It’s a gigantic bubble, fed by crazed central bankers,” Hutchinson continued. “At some point it will all crash. I believe that point is at least six months away, probably more than a year away, probably not more than two years away.”
None of this bodes well for a continuation of the current stock market rally.
But how will we know when we are close to a top?
“Watch bond yields,” Hutchinson says. “If they start rising seriously (10-year Treasuries more than 2.5%, say) that will be a sign that even Bernanke can’t keep the bubble inflated.”
Related Articles and News:
- Money Morning:
Did the Fed Just Admit QE3 Has Been a Major Failure?
- FOX Business Network:
How Does Wall Street’s Obama-Era Rally Stack Up In History?
- The Daily Ticker:
Say Hello to a New Bull Market?
- Yahoo! Finance:
As S&P 500 Flirts With 1,500, a Look at Past Visits
- Bloomberg News:
S&P 500 Posts Longest Winning Streak Since 2004 on Profit
- Bloomberg News:
Credit Bubble Seen in Davos as Cohn Warns of Repricing
- Bloomberg News:
Fed Pushes Into “Uncharted Territory’ With Record Assets