With the stock market (as seen in the S&P500) recently near the 1020 level, there is no debating that the rally since the early March lows of 666 has been a very strong one. Also, there have been very strong rallies in other markets as well (Nasdaq, Emerging Markets, Debt Markets, etc.)
Below is the 1-Year Daily Price Chart of the S&P500:
Chart Courtesy of StockCharts.com
Given this strong rally, one is led to wonder as to what the stock market is “telling” us. Such a strong rally in the face of pervasive economic weakness seems contradictory.
The stock market seems to be indicating that we will have a strong and quick economic recovery (likely a “V” recovery). This can be inferred in a variety of ways. One way would be to assess the S&P500’s current price level of 1000, in which we can see that it is pricing in a market PE of 20 to a 2009 operating earnings estimate of $50. As well, this would equate to about 13x a 2010 operating earnings estimate of $75. Of course, one can argue whether the “As Reported” figures should be used, which would generate an even greater earnings multiple.
As I have indicated previously, I believe this market rally off the March lows of 666 is a Bear Market Rally – meaning by definition that a low below 666 will be forthcoming. I’ll be further addressing this issue shortly.
The stock (and other markets) rally since mid-March appears to me to be very “speculative” in a variety of ways. One need not look too far to see many disconcerting aspects in this rally.
Since the stock market seems to be “pricing in” a very significant, and lasting, economic recovery, there will likely be significant repercussions should one not materialize. These repercussions would likely entail a significant decline.
Perhaps the main question should be whether a strong economic recovery is fundamentally assured to the extent the stock market seems to be indicating.
SPX at 982.3 as this post is written