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| Stocks: Do You Believe in Magic? - Aug. 17, 2004 |
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Introduction
The Lovin' Spoonful sang, "Do You Believe in Magic?" Wall Street occasionally proves that you should, often doing it quite visibly during expiration weeks. But if you accept the definition of magic as "an illusory feat," be very careful with your investment activity when the performance is in progress!
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Let's assume for a moment I am correct about the stock market's relatively near-term prospects. That the decline commencing from the closing prices set on June 23rd and June 30th will not conclude without something resembling a selling climax. This certainly would have political implications -- negative ones for Republicans, positive ones for Democrats. And if timing is always a critical element, it is even more so with regard to this scenario. I believe the time has now arrived to think more seriously about how the stock market might influence November's election.
Here are a couple ideas along with supporting numbers to put some key items into perspective. The numbers relate specifically to my seven-measure tracking group.
* Based on my current analysis, the decline commencing in late June has become a confirmation that the cyclical bull market running from the October 2002 lows through this year's highs is over.
* Thus, the stock market was/is reverting to the longer-term operative trend, which is that of a secular bear.
* Therefore, the decline from the June highs through last week's lows is not the mere "correction" the folks on CNBC and in the other venues comprising the regular propaganda loop are describing it as. It is something that in the fullness of additional time will prove a good deal more onerous.
* Already, though, the losses are pretty rugged. From respective late-June closing highs through last week's lows, the tracking group was down an average 9.3% (median decline of 7.6%). And from respective 2004 closing highs through last week's lows, the average and median declines were 11.3% and 9.0%.
* The current leg of the decline is not over, and it is not likely to segue into anything very sustainable in the way of a rally without something at least resembling a selling climax.
Taking into account yesterday's sharp rally, (another instance of the "expiration magic" to which I referred earlier as well as in a prior missive?), the respective year-to-date declines for the DJIA, S&P 500 and NASDAQ 100 still weighed in at 4.8%, 3.0%, 9.6%. For all seven measure in my tracking group, the average year-to-date decline was 4.9% Viewed in absolute terms, these numbers are certainly a disappointment for investors (and for voters). But when examined in relative terms, they constitute a far bigger disappointment.
Given the souring of overall sentiment on more than one front in recent weeks, it is not easy now to recall just how ebullient the vast majority of Wall Street analysts were as this year was kicking off. Euphoria ran at nothing short of rampant levels. Thus, juxtapose the stock market's actual performance and those expectations and you wind up with results qualifying as "highly disappointing." At least in my opinion you do.
I've used this missive to help set the backdrop for a coming discussion of the more specific political ramifications, should my overall judgments prove correct. I'll opine now, though, that in a tight Presidential election, like the one I currently envision for November, the stock market's behavior over the next few to several weeks could easily become the on-the-margin factor determining who is sworn next January.
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