Market Hits New Highs In the Summer of 08?
08 February 2008 at 9:46 am by Gary Gordon
New highs by the summertime? It sounds preposterous. Stocks feel so terrible right now… surely the only direction is down… right?
Perhaps. But if history on financial crises, real estate and mild recessions is any guide, stock assets might only require 4 months to recover from a bottom.
In the summer of 1990, the stock market fretted over devalued real estate. Stocks also contended with the savings-and-loan crisis as well as the possibility of recession. Result? Stocks tumbled 20% from July to October of 1990.
As investors in 1990 struggled with the idea of a bearish winter, several key forces began changing the landscape of impending doom. The Federal Reserve slashed interest rates. And overseas investors bought large chunks of American banks.
What followed? An actual recession did indeed come to pass in 1991. A bad economy troubled consumers and businesses alike. Yet the stock market reclaimed its losses by February of 1991… just four months after hitting a bottom in October 1990.
Obviously, it is impossible to know whether we hit bottom on the intra-day, 600-point recovery of 1/23/08. One can’t know with certainty if we will revisit the lows of S&P 1270 S&P 1275. Nor can one accurately determine if the bearish environment will get far worse before getting any better.
Nevertheless, it is important to investigate the similarities between 1990-1991 and 2007-2008. We’ve witnessed a crushing blow to faith in our financial system… like we had in 1990. We’ve watched real estate deal with a down cycle… like we had in 1990. And we’ve seen the world go haywire over the likelihood of a U.S. economic recession… like we had in 1990.
Now for the good news: We’re receiving Federal Reserve interest rate stimulus… like we had in 1990. Major financial firms are taking in money from overseas suitors… like they did in 1990.
There is one key difference. Congressional leaders have passed a tax/real estate package to stimulate the ailing economy, increasing the likelihood that the recession will be mild. Credit that bonus to the reality of 2008 politics, where neither political party wants to be seen as "not helping."
The major take-home here? It is highly conceivable that we have hit bottom (or will soon), and the stock market may then choose to anticipate a late 2008 economic recovery. By anticipating better economic times for late 08, stocks may begin reclaiming what was lost very soon. And that puts stocks back at their October 2007 highs by Summer 2008.
Granted, history doesn’t repeat itself exactly. But it does repeat itself in remarkably similar ways. It follows that the smart money may "bargain hunt" in-and-around today’s S&P 1275-1325. Vanguard Total Market Index (VTI) could be the best way to capitalize as well as diversify.
