Two decades ago, the nation was on pins and needles about the transition from “Desert Shield” to “Desert Storm.” The U.S. and its allies had given Saddam Hussein until January 16, 1991, to get out of Kuwait, but he mocked the West’s threat. On Wall Street, stocks were depressed throughout the Gulf War buildup period, trading below 2500 on the Dow, down from a tantalizing-high double-top at 2999.75 on both July 16 and July 17, 1990. Pundits warned that gold would soar and stocks would collapse once war erupted.
At the time, I was editing financial newsletters for Phillips Publishing (now called InvestorPlace Media). In a “flash alert” in early January 1991, Richard Band urged his subscribers to load up on stocks and sell gold in advance of the upcoming Gulf bounce-back. He was clearly in the minority at the time – the Dow closed January 15 at 2490 – but sure enough, in the early hours of January 17, 1991, Desert Storm broke out in the Persian Gulf. All night long, aircraft from the U.S.-led coalition hit targets in and around Baghdad. The world was glued to CNN-TV, as investors around the world gleefully bid stocks….UP!
That Thursday morning of the air attack, the Dow rose 115 points (+4.6%) in the second largest daily point gain ever, to that date (second only to October 21, 1987). Then, the Dow rose by a spectacular 18% in just one month, to close at 2935 on February 15. The other big surprise that day was that gold and crude oil went into a spectacular free-fall. Gold fell 6%, from $403 to $379 on January 17. Oil suffered its worst one-day drop, falling from $32.28 to $21.48 a barrel, losing 33% in a single day.
Most Market Threats turn out to be False Alarms
Since we’re approaching mid-January again, let me cite one more scary mid-January from the end of the 1990s. On January 11, 1999, stocks fell four straight days, taking the Dow down 522 points (-5.5%) from 9643 to 9120 on fears of a Latin debt crisis that never happened. At the time, Mexico and Brazil were “collapsing” over renewed debt concerns. Wall Street’s nervous Nellies thought that the Latin American markets would surely bring the U.S. market down with them. What happened next? The Mexican market rose 91% in the first quarter of 1999 and the professional worriers changed subjects – to the “Y2K crisis.”
The computer bug called “Y2K” never happened, so our attention quickly shifted to another kind of bug. In the last decade alone, we’ve seen four major market scares over Mad Cow Disease in Europe, Severe Acute Respiratory Syndrome (SARS) in China, H5N1 (Bird Flu) and H1N1 (Swine Flu), none of which caught any traction – thankfully! In 2005, Hurricanes Katrina, Rita and Wilma begat scary new tales of future windstorms that never came. And dare I mention that global temperatures have cooled since 1998?
P.S. We shouldn’t forget that those great years – 1991 and 1999 (plus 1995, 2003 and 2007 and 2011) – are third years of the Presidential election cycle – so we also profited from mid-term election euphoria.
“Black swans” are dangerous because you don’t expect to see them, but we generally take action to avoid the crises we see coming. With Y2K or health threats, “that which we fear most is least likely to happen.” Last year at this time, the fear of inflation, resulting from QE-1, dominated the pessimists’ rhetoric, but inflation was low last year. In that light, let’s examine the market threats that are so prevalent in today’s press. Perhaps they too will look just as silly as Y2K and SARS in the rear-view mirror a year from now.
Can the Market Overcome Real Estate Deflation, Slow Job Growth and Rising Debt?
Since 1990, I have benefited from the market wisdom of several experts who have asked me to help them reach a wider audience with their positive market views. I have worked with Louis Navellier since 1997, launching and editing two of his four newsletters. Now, I edit Louie’s weekly Market Mail and write this column for his corporate Web site. Before that, I also profited from 16 years of editing John Dessauer, who still writes a newsletter out of Florida. Today, I’m borrowing from John’s January issue to look at rising debt, slow job growth and real estate deflation to see if there are any silver linings in these clouds.
Real Estate Deflation: The latest S&P/Case-Shiller data scared the stock market by showing how October home prices in 20 major cities were 0.8% lower than a year ago. Will home prices ever rise again? Of course they will. Markets always self-correct, but let’s look closer at the October data. Case-Shiller only follows 20 cities, not a broad array of national markets. A much broader national index published by the Federal Housing Finance Agency (FHFA) shows average home prices rising in October. Case-Shiller does not cover any city in seven of the 10 best states followed by the FHFA survey. Still, we must admit that home prices remain chronically flat due to two other major trends: Home foreclosures and lost jobs.
Slow Job Growth: The housing market malaise is directly related to families in crisis over a long-lost job. But the job situation has already turned the corner, with over 100,000 net new private sector jobs coming on line each month, while new claims for unemployment fell to a two-year low last month. When millions more families have regular income from jobs, the housing and job crisis will be solved in tandem. That will likely happen, since corporations are currently sitting on nearly $2 trillion in cash, which they will use to hire more workers once it becomes clear that (1) the economy is recovering fast enough to justify expansion and (2) governments won’t punish them with stiffer regulations and more mandated benefits.?
Rising Government Deficits: Back in 1991, the federal budget deficit reached record highs, due to the Gulf War and recession. The Congressional Budget Office (CBO) and nearly everyone else predicted growing deficits for the rest of the decade. Two popular books in the early 1990s were “Bankruptcy 1995” and “The Great Reckoning,” all about debt. Yet we saw budget SURPLUSES from 1998 to 2001. Now, once again, the CBO sees $10 trillion in deficits over the next decade, but economist Scott Grannis calculates that with spending restraint and pro-growth policies, “the federal budget would be balanced in 5-6 years.” That may be too idealistic, but we will likely see tax revenues rise from the recent tax cut extension (as happened after similar policies in the 1920s, 1960s, 1980s and 2000s). A return to growth, with greater profit incentives, spurs higher tax revenues and less need for government bailout programs.
Obviously, a return to economic growth and smaller budget deficits would be good for the stock market, but corporations have already fared well in a rather slow recovery. The Bureau of Economic Analysis reported third quarter U.S. profits up 26.4% from the third quarter of 2009. Pre-tax profits came in at a $1.7 trillion annual rate in the third quarter, slightly above the pre-crash peak in 2006. The S&P 500 is closing in on a 100% gain from its 666 low in March of 2009, due mostly to a tsunami of rising earnings.
Most S&P 500 companies have global operations, so they don’t rely on domestic consumption to profit. But 2011 is the year for companies to add domestic market profits to their still-rising global gains. The new Congress will cooperate. Since 1962, the average S&P gain from mid-term elections to the end of the following year is 20.9%, and gains are even higher than that when Congress gets this big of a shake-up, Get ready for another year in which the perma-bears will taste defeat…and create a new set of scary tales.