It’s a long way from 950 for the S&P 500

August 24, 2009

It’s hard to believe that little over a month ago, investors were holding their breath to see if the S&P 500 had enough momentum to burst through 950 – a psychological level that had held firm since November of last year. Carry through buying Monday from last week’s renewed cheer that the U.S. and global economies were leaving recession behind has pushed the S&P 500 to 1033, its highest level since Oct. 6, 2008 when it traded at 1056.89.

But as I noted here last week, markets continue to be pretty fickle when it comes to betting on recovery vs. continuing slump.

Bespoke Investment Group, however, notes that it’s getting harder to argue that the more than 51% jump in stocks since March is just a Depression-like rally within a longer-term down trend.

The current rally is now bigger and longer than any of the rallies seen during the 1929 to 1932 crash.  The biggest rally during the ’29 to ’32 period was 46.77% over 148 days.  The current rally is up 51.68% over 165 calendar days.

That being said, I’m not sure history is the best guide for anything at this point given the unprecedented nature of the credit crash and the global response to keeping financial markets on life support. The consumer continues to be key and “Cash for Clunkers” aside, it’s still an open question whether Americans are up to the task of reflating the U.S. economy. Further deterioration in the jobs picture or even a whiff of sagging confidence (as unreliable an indicator that it may be to gauge near-term spending) is likely to crush optimism in the market.

And then there’s  China. The swoon on the Shanghai exchange last week shook global financial markets as fear that a stumble by this emerging powerful engine could set back the world recovery.

Barry Ritholtz over at The Big Picture, posts the thoughts of Andy Xie, a former Morgan Stanley economist now living in China, who expects the A-share market (stocks denominated in renminbi) to crash in the fourth quarter.

I am not sure this bubble that began six months ago is truly over. The trigger for the current selling was the tightening of lending policy. Bank lending grew marginally in July. On the ground, loan sharks are again thriving, indicating that the banks are indeed tightening. Like before, government officials will speak to boost market sentiment. They might influence government-related funds to buy. “Experts” will offer opinions to fool the people again. Their actions might revive the market temporarily next month, but the rebound won’t reclaim the high of August 4.

This bubble will truly burst in the fourth quarter when the economy shows signs of slowing again. Land prices will start to decline, which is of more concern than the collapse of the stock market, as local governments depend on land sales for revenue. The present economic “recovery” began in February as inventories were restocked and was pushed up by the spillover from the asset market revival. These two factors cannot be sustained beyond the third quarter. When the market sees the second dip looming, panic will be more intense and thorough.

Whether you agree with Xie or not, China’s influence on world markets is also a reminder that the world has changed enormously since the Depression, which makes comparisons between now and then, while interesting, not necessarily useful.

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