A Statistical Look at SP500 Forecasts
Many Bears continue to contend that this current market is much overvalued and a return to the March lows of 2009 is inevitable. Even the more moderate of the Bears think 800 is a good possibility in conjunction with a double dip recession, or "W" economy.
I challenge these bears to make their case in a non-emotional and statistical fashion. What I hear from these strategists is a "gut feel" response with no statistical backing. They contend that, of course, the current fiscal and monetary stimulus will wear off and the economy will relapse. The extrapolate the past year of weak consumer demand infinitely into the future (the worst mistake any investor can make is extrapolating the past to the future).
So I will challenge such strategists with data. Here is the exact Money Market fund data from the ICI which keeps track of this for the government. Go to www.ICI.org for the data to see for yourself. I also go to FRED, the Federal Reserve repository for statistical data, but the utilize ICI data for these series anyway. So, might as well go straight to the source.
March 4 = $3.903T
August 5 = $3.606T
So, in the move from SP500 = 666 to 1000, the money market funds have only gone down by $300B, or 10% of total available “dry powder”. This it does not sound like wild bullishness to me and shows that to the contrary, much money remains on the sidelines to be invested. This money is earning less than 1% right now, so is a very poor long term investment and must go somewhere once panic subsides. Will it go to bonds with the prospect of higher inflation on the horizon, which hurts bond returns? Or will it go to equities? It sure can’t all go to gold, which has a total world capitalization of only about $300B.
Another measure from ICI is the relationship between stock mutual funds and money market funds.
In December 08 stock market funds were $3.704T and money market was $3.341T, or almost a 1:1 relationship
By June 09 this had changed to $4.010T for stock and $3.652T in MM (which were still higher than in Dec 08 showing a net inflow to funds of all kinds). But it is still no where near the historic relationship between stock and MM of 3:1. So, there is a long way to go before the market even gets back to a “neutral” position in respect to available funds. The Bears apparently don’t want to pay attention to such common sense analysis but instead are still responding to their own fear.
I don’t have the exact relationship between stocks and MM as of Jan 2007, near the top. It would be very interesting to observe. But we can estimate it. I do have the MM funds for Jan 2007. They were right at $2T. We can estimate the total mutual funds holdings by just extrapolating the June data of $4T by the ratio to the market top for the SP500 (1550) vs. the SP500 in June (900). That ratio is 58%. So, using extrapolation, we get to a total mutual fund stock holding of $6.9T. This is likely pretty close to the peak, and was therefore better than a 3:1 ratio of stock to MM (more like 3.5:1) at that point.
So, let’s say we get to 2:1 given the lousy economic outlook according to many of these Bears. That would put the stock holdings near $5T and the MM near $2.5T, still more MM than the peak in 2007 (when MM was minimal as a percentage), even considering that more money has come into the investment markets in the past 2.5 years. By this approach, we can guess that the market could get to 1200 SP500 without too much trouble, even in a slow growth economic outcome with persistently high unemployment.
Repeat: a return to SP500 of below 800 is extremely unlikely and a higher likelihood is a slower further rise in the SP500 with occasional consolidations.
I agree with your point regarding “dry powder” but I don’t see it coming into the market until they see OK 3rd quarter figures and a not so bad back to school shopping report. I think there is no way they jump in now if they have been cautious so far. so between here and the end of the year what do you see as a potential upside catalyst? I see several potential downside catalysts – bad BTS #s, fear of October, profit taking, market voting on health care reform, etc. I am inclined to believe that the recession will be over by 1q ’10
Jay, I agree with just about everything you say. Fortunately for me, I have been almost 100% invested since March (I really never sold out on the way down, and that was UNfortunate). But right here, at a key technical level of 1000 on the SP500, I would not want to put money in if I had stayed on the sidelines.
But eventually, anyone who wants to truly “invest” rather than just sit on cash which loses ground to inflation, will need to go back in. It never feels good to invest. The only time it feels like “you can’t lose” is exactly the time when you will lose. So, while I agree we are due for a pullback, and the seasonal factors sure favor that conclusion, how will a drop of 100 points on the SP500 make people feel better about getting in? Answer: it won’t. They will feel even more convinced the market is going back to March levels. During a selloff, it is always scary.
To get long in this market, you need to believe that the economic improvements (stable banking, bottoming housing, bottomed inventory levels, reorg of GM, etc) will lead to a better economy. You must also believe that our political system will do what it does best and force compromise that will not damage the economy. These are not any harder to believe than the bear case. And the bears already had their chance and failed.