In what the Wall Street Journal calls “a comeback of historic proportions,” the U.S. stock market’s banner year closes later on today. The paper says, “With one trading day remaining in 2009, the Dow is on track for its biggest annual gain since 2003, when it rose 25%. It finished Wednesday up 3.1 points, at 10548.51, a fresh peak for the year and the highest since October 2008.” Leading its business section, New York Times also takes note of this year’s rallying stock markets, which “will ring out one of their most volatile periods in history” in a few hours….
Earlier this year a friend of mine argued that we were going through a bear market rally. It seemed a very defensible position to me. But earlier this month I sent him a link to this chart:
The current trend is the dark blue. If this is a bear market rally, this is an unprecedented one. It would be the longest and most robust bear market rally on record. On the other hand, recent macroeconomic events have been somewhat unprecedented. I don’t really see where this rally is based on the soundness of the economic fundamentals of the American economy. Before some might have argued that the efficient wisdom of the market was giving us a signal to which we should pay heed, but the American (and to some extent world) economy has been through two exuberant bubbles in the past 10 years. There’s a flaw in the short term logic, so to speak. The market may point in the right direction in the long run, but in the short run we might still be screwed.
My friend is putting his money where his mouth is, so I tend to listen closely to his judgement as I know he is more than simply talk. I’m sure that readers also have opinions and are making decisions appropriately, so I’m curious the word out on the street is.