The Susan Boyle Rally

By now I suspect that most of the world’s population which is connected to the Internet knows about Susan Boyle. She is the unassuming-looking, late-40s woman from Scotland who amazed the judges (and the world) in her audition for the television talent show “Britain’s Got Talent.” Within a week of being placed on YouTube, her rendition of “I Dreamed a Dream” has been seen and heard by over 12 million people. In an industry that so highly favors looks and image, it’s inspiring to many to see Susan Boyle receive so much praise and notice. As John Rash, an advertising columnist put it, “[her video] encapsulates the power of everyday people becoming overnight sensations.” Bravo, Susan, Bravo.

I think the stock market rally we’ve been experiencing since early March has much in common with Susan Boyle. At the beginning, there was much skepticism. Economic data was clearly drab and uninspiring. Most of the “experts” were not looking at the markets favorably. I suspect many of them expected the market to disappoint or even fall on its face.

Just as Susan’s clear and melodic tones stunned the judges, the market’s rise began to sway sentiment. As the rally progressed, grumpy skeptics, who before only saw gloom and doom, began to see “glimmers” of favorable economic activity. With the market now over 20% above the March low, many more investors are seriously discussing the market’s potential? Is this the big turn? Can it be sustained? Can this market become a “big star?”

We hope the best for Susan Boyle and her budding singing career. We can’t predict whether or not she’ll be a big success, but we hope she will be. Similarly, we hope the current rally will be sustainable and even become the next bull market, but we can’t really predict this. Yet, we are encouraged by the market’s tone and responsiveness to new information (bad or good).

In our view, the fundamentals that matter to the capital markets are always a mix of positives and negatives. The direction of the market is not so much determined by the difference between these two extremes, but rather by which part of the spectrum captures investors’ attention.

Here is a partial list of positive fundamental factors as we see them now:

• High Cash Levels. We see $9 trillion in money market accounts. These funds had been in stocks and bonds and now just sit there waiting for the “all clear” signal to get back in.
• Sentiment. High bearish sentiment (we saw historically high levels in early March) often accompanies the bottom of the market.
• Interest Rates. The Federal Reserve is determined to keep short rates low (which helps a large number of borrowers) and has also begun a tactic aimed at lowering longer-term rates, especially mortgage rates. This could stabilize the housing industry and via refinancing, put more cash into households.
• Lower Energy Prices. The dramatic decline in energy prices from last summer is another stimulus to the American household budget.
• Government Action. The new administration is determined to do as much as it possibly can to jump start the economy and return confidence to the system.

Despite the above, we continue to see significant negatives which may impact the establishment of a new bull market:

• Unemployment. As layoffs continue, many may worry about the impact this has on consumer sentiment, spending and saving. The fact that employment is a lagging indicator may not matter to the average citizen watching the nightly news.
• Earnings. First quarter results have just started to trickle out and despite good news from Wells Fargo, it’s hard to imagine that all companies will report better-than-expected earnings in a quarter where GDP is expected to fall 6%.
• “Expert” Opinions. The handful of economists and academics credited with “predicting” this recession are mostly staying with their pessimistic forecasts. Unless they are particularly nimble (and different from past prophets of doom), they will miss the upside of a new bull market. Yet, the combination of their new-found fame and continued gloomy opinions may sway investor sentiment and stifle the rally.
• Bailouts. Major U.S. industries (banks, real estate, insurance, banking, etc.) may yet require a great deal of government assistance and/or dramatic changes before the “all clear” signal can be sounded. Regardless of the skill of the decision makers involved, these industries’ status is highly uncertain and fraught with risk.
• The Other Shoe. In the back of everyone’s mind seems to lurk the fear that something else, unexpected and dire, is just around the corner, and could bring us right back to the pain and losses seen last year. This fear is particularly worrisome because it’s impossible to prove the absence of something. To the extent that this fear inhibits action, it could dampen the recovery.

Over the last few weeks, the market has clearly been focused on the ““glimmers of hope” and not the “worst economy in 50 years.” Will this continue? Hard to say. I think the time to be defensive is long past. In my view, cash is the most expensive and “risky” asset, especially for those investors with longer time horizons and important financial goals yet unmet. Time will tell.