Headlines as the market closed on Wednesday October 14, 2009:
Dow Jones Marketwatch: “Dow Reclaims 10,000”
Wall Street Journal: “Dow Tops 10,000"
Reuters: “Dow hits 10,000 Mark on Earnings Optimism”
Unfortunately, or fortunately, it was the first time the Dow closed with five digits since last October. Big picture: the sobering reality for investors is that the Dow is right where it was 10 years ago; on October 15th, 1999 the Dow Industrials closed at 10,019.
We have had one heck of a run since March but according to published data, lots of investors have missed this up move; more on this below.
Markets fall when investor’s - rattled to the point of throwing in the proverbial towel - bail out (creating supply). At some point this ‘capitulation’ diminishes available supply and the market makes a bottom. (The flip side is that the ‘defensive’ cash becomes (potential) new demand for equities.) Consider this: a fully invested account represents no potential for net new demand to the market however, an account that is sitting in cash represents $$$ of potential demand for equities. In March of this year the equity markets reached such a tipping point; supply dried up and enough new demand re-entered the picture to produce a bottom and the subsequent rally. Several months later the media (sceptics the whole way up) are celebrating the Dow's return to 10,000.
According to published statistics, many investors have missed this rally. There are a lot of costs associated with this, if that is the case. Since March 9th, an investor in long-term US Government Bond Funds has lost approximately 7%, an investor in Money Market Funds has gained less than 1/10th of 1%, while the purchasing power of their Dollars declined 15% and the equity markets climbed more than 50%.
There are two facts that as investors we must realize; #1- bond funds attracted net deposits of $209.1 billion in the first eight months of 2009 while stock funds drew just $15.2 billion. Said another way, for every new dollar moving into equities, $14 were moving into bonds. What does this mean? Investors that were burned during the collapse of 2008 were busy flocking to the perceived safety of bonds right as the 2009 bottom was materializing. #2 - the continued decline of the US Dollar. The Dow has recaptured Dow 10,000 in terms of US Dollars. While this rally has taken the Dow back to even for the decade, ‘foreign’ investors have not yet been made whole for the decade. Due to the (continued/continuing) decline in the value of the US Dollar, the Dow would need an additional rally of 45% to get back to its October 1999 levels - in Euro currency, assuming the $ declines no further.
There is risk to investing in equities; domestic or international, but there is also risk in keeping assets in money market funds when rates are 0.25% and when the Dollar is trending lower. Investors have flocked to cash and bonds because they are perceived as ‘safe’.
I have advised clients on investments since 1983 and have learned that in this business it is the conventional wisdom that can be the most dangerous, and for this reason objective tools that are based upon supply and demand rather than fear and reticence can add tremendous value. That is what I use to guide your portfolio. My primary market indicator (the NYSE Bullish Percent - BPNYSE) has kept the offensive team on the field for all but a month since March 12th and remains on offense today. I am currently emphasizing two equity based asset classes; International Equities (emerging) and US Equities (small cap) along with some exposure to metals; industrial & precious - in the commodity area.
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