He got the job he wants. The stock market is up more than 50% from its lows. Confidence is up. Even home prices have improved. And yet, why isn’t our favorite central banker smiling?
Take a look at the graphic below from dshort.com comparing the S&P500 during three historic jolts to the economy and you’ll get a sense of just why: From a technical standpoint we are on the knife’s edge of hope and peril.
The gray line shows the roller coaster ride investors endured over the first two years of the Great Depression. A big plunge. Then a ride to the moon (nearly 50% higher) and ka-boom, a big jolt down that landed the market 75% lower nearly two years later. It was a classic, secular bear market: a sucker’s rally followed by the falling knife.
The red and green lines tell very different stories and follow two previous shocks to our economic system: the oil crisis of the early 70s and the tech market bust of the early aughts. Their paths are the yellow-brick-road of recovery — a little scary at moments but basically a happy tale.
That brings us to the blue line — the story unfolding before our very eyes. First, the stomach churning plunge (have our teeth stopped chattering yet from the post-Lehman bankruptcy death spiral last year?). And then, starting in March, the tidal wave of optimism which has put the S&P500 more than 50% above its March low, and much more quickly than during the recovery periods of 1974 and 2002.
Doug Short, a retired English professor turned market seer, asks the obvious question about the current rally: “Will it continue to show resilience?”
In future posts, I’ll tell the bullish story on the Great Rally of the Great Recession — though I confess I’m skeptical of those numbers. Then I’ll put forward the secular bear market narrative. Be forewarned: The stories will be graphic.