And on this good news the market shoots to the moon? What is everyone smoking? This is like getting excited about the Tampa Bay Devil Rays winning the World Series because they brought up a new middle relief picher from AA ball...
If these Markets didn't have me scared before, they sure have succeeded now! Things must really be bleak down there on Wall Street....
Short term, the market actually made 200 points on the DJI just on the futures before the market opened. Ditto for 40 points on the NASDAQ futures. By the time the market opened the shorts had to move and they surely did. Bravo for the Plunge Protection Team -- with some futures trading, CSCO earnings and alleged increase in productivity we had a monstrous rally with most of the action occurring before or immediately after the market opened.
Long-term is more interesting. I wonder if anyone reading this remembers 1996. By February of that year the market was on a tear but the P/E was still 15 but the market sold for 3.2 times book value (Average 1.74), the dividend yield was 2.4% (average 20 years 3.6%) and the total capitalization of the market was 90% of the Gross Domestic Product. Pricey stocks but on a tear.
On 5 December 1996 with the DJI at 6437, Alan Greenspan made his first "irrational exuberance" comment. By 1999 the market was really on fire and in 1999 and 2000 the Fed raised the Federal Funds Rate to 6.5%! This pushed real interest rates to 4.5% since inflation was 2% or less. Exuberant growth soon ceased to be a problem.
With this tight money, the yield curve inverted, the ten year treasury yielded 5.25% while the short term rates were 6.5%. The dollar soared in in foreign markets, gold and commodities tanked and tight money became evident. Also, by the way, 5 trillion dollars of stockholder equity disappeared almost immediately.
Since 2000 old Alan and the Fed have done everything possible to boost the market or at least hold the DJI above 10,000 and the NASDAQ above 1700. Today, short-term, they succeeded. The question is will investors buy stocks with PE'S in excess of 25 with no clear pattern of earnings growth and with no certainty that erratic Fed moves will not complicate investment decisions beyond the average person's ability to comprehend the problems.
To protect the markets the Federal Funds Rate is now 1.75% which is a 40 year low. To achieve this low interest rate Alan and the Fed cut rates faster and further than at any time in the entire history of our Central Bank. In addition, they must now believe in the "wealth effect" or the belief held by investors that their stock market holdings are really a form of money that they can and do spend. In any case, the Fed seems now willing to buy the market --if we can believe what they say and what others have reported.
From all perspectives, it is hard to be an optimistic investor at the present time. A great deal of the problem lies at the feet of the Federal Reserve. Good intentions have resulted in erratic movements of the markets based purely on the basis of bankers prejudices as to the economy and the markets.