You Write the Commentary (Because I Have No Idea)

by JDH on October 20, 2012

I have no idea what to tell you this week, because I have no idea what will happen between now and the U.S. Presidential Election during the first week of November.  There are two schools of thought.

One perspective is that the recent decline in the markets will continue.  The Dow dropped 205 points on Friday, or over 1.5%.  That’s a big one day drop.

You could easily argue that the Dow made a “triple peak”, hitting

  • 13,593 on September 14, then
  • 13,597 on September 20
  • 13,610 on October 5 and then failing to make a new high by only peaking at:
  • 13,552 on October 16

The close on Friday at 13.343, or 2% below the October 5 peak could be interpreted as a bad sign.  Perhaps the pre-election rally has run out of gas?  That’s one possibility.

The other possibility is, of course, the exact opposite: the bull run (or bear market rally; take your pick) continues on.

A quick review of a longer term chart of the Dow shows that from the bottom of 6,627 on March 9, 2009 the Dow has climbed an impressive 6,716 points.  That’s more than a double, an increase of over 101%.  That sounds like a bull market, doesn’t it?

Pick your time frame, and tell whatever story you want.

The all-time peak was 14,066 on October 8, 2007.  That was five years ago, so for five years the market has failed to make a new high.

That’s bad.

But we are now within spitting distance, a mere 723 points of that all time high.  All we need is a 5.4% increase, and we are there.  The market was down 1.5% on Friday; if it reverses and starts going up by 1.5% per day, we could have a new all time high by the end of the week!

That’s good.

So which is it going to be?

I have no idea, but since I’m the guy who gets to ask the questions, let me ask another one:

Why has the market doubled since March, 2009?  Is it because the economy has recovered, everyone is working, and all is good?  That’s not my interpretation.  Unemployment is as high, or higher, than ever, and debt is at massive levels.  (Here in Canada, Statistics Canada reported this week that Canadians are knee deep in debt, carrying debt of more than 163% of our disposable income, the highest level ever).

It could be that with low interest rates corporate earnings are recovering (although Google’s earnings report this week would disprove that point).

An alternate theory is that Fed money printing is responsible for most (or all) of the market’s gains.  They are pumping the market up in advance of the election.  That, to me, is a much more plausible theory.

If that theory is correct, a prediction is easy to make: we will see a new high on the Dow before election day! Sounds implausible, but we are only 5% away from that point now, so it’s not impossible.  A new high would allow the incumbents to say “Look, all is good, the market is at a new high, vote for me!”

I’m not an American, so I don’t have any sense of whether or not the public will buy it, but that’s the logical approach for them now.

I guess we’ll know in three weeks what happens.  Stay tuned, thanks for reading, and see you next week.