Thursday, December 23, 2010

S&P 1250


The stock market finally breached the 1250 threshold yesterday despite economic news that was really more on the weaker side.

Not only is level psychologically important (since the market had made several failed attempts over the last few weeks to close above 1250) but it also marks the return to where we were in September 2008, right before the Lehman Brothers collapse.

This morning's Financial Times noted the recovery of the S&P to current levels by making some other comparisons to the fall of 2008:

Most sectors have barely budged but after two years of crisis and recession one surprise is that the consumer discretionary sector is the best performer, worth 22 per cent more than it was pre-Lehman. The financial sector, meanwhile, is down 24 per cent. More surprisingly, Standard & Poor's data show the proportion of the index in financials at 15.9 per cent, is actually larger than the 15.3 per cent pre-Lehman, because new banks have entered the index. This is still down from the 20 per cent peak in 2007. As to the future, the market is cheaper as a multiple of earnings but pays almost a fifth less in dividends. It is not time to relax.

Imagine that: if in the tense days of the September and October of 2008 I had suggested to you that we load up your account on retailing and other consumer discretionary stocks you probably would have thought I was crazy. And yet in hindsight that was the correct decision.

A few other points. In the period since September 2008, where the stock market has returned essentially 0% (since we are just back to where we started), gold has risen by +169%, and oil is up +48%. Commodities have been the true growth of the past couple of years, and with global demand continuing to rise despite tepid economic growth in the developed world this trend seems likely to continue.

Second, while the S&P has recovered the lost ground of the past couple of years, we are still -19% lower than we were in October 2007. From this standpoint, then, the market could easily show significant gains ahead.

Finally, interest rates on longer-dated Treasury securities have barely changed in the last couple of years. The 10-year US Treasury was yielding slightly more than 3.7% in September 2008, and now yields 3.35%. With all of the talk that the rise in stock and commodity prices are foreshadowing a rise in economic growth, as well as inflation, the bond vigilantes remain very calm.

Let's hope that continues into 2011.