Probably not, says Sterling Jenson, Regional Managing Director of Wells Capital Management. In fact, he calls the current financial climate the Bubble of Pessimism because of the extremely negative mood of the markets, the public, and the media at the moment. He thinks there has been an overreaction at this point, and he is expecting to see improvement before much longer.
He is helped in that thought by the fact that the Dow Jones Industrial Average shot up over 250-points toward the end of trading on Tuesday following the announcement of the big federal funds rate cut from the Federal Reserve.
While he doesn't gloss over the current trouble, saying that we are in the thick of a severe recession, he sees a number of signs that we have probably weathered the worst of the storm or will very shortly unless there is a simply catastrophic event we can't foresee.
Jenson calls the current recession eerily similar to the one in 1974. If that comparison continues to hold, it means we'll be out of the current trouble by June. We've been in a decline for 12 months, and the ‘74 problems lasted 18-months. It is particularly significant that the stock market in '74 bottomed at 12 months. He says it's quite possible that the markets have already hit their lows, since they have recovered roughly 20-percent from the bottom in November. As of Tuesday, the Dow was trading at the same general level it was at in early October. It's even possible, according to Jenson, that the improvement will become apparent as early as next month.
The most impressive number to come from the comparison with 1974 is the fact that if we play all the way through with the model, the S&P 500 will be up 45-percent next year on this date. He jokes that we'll settle for less, but that outcome is at least a possibility. The high percentage is in line with the rebound from past bear markets.
We're helped right now by the fact that the markets are clearly pleased by the veteran financial team assembled by President-elect Obama. Jenson won't be surprised if the media sees the inauguration of the new president as the time to jump on the positive bandwagon after more than a year of what he feels is overly negative and sensationalized reporting.
Backing Jenson up are a number of indicators he feels carry collective weight starting with the fact that this recession is not as severe as several others. Topping the list of positive influences is the fact that the S&P corporations have hundreds of billions of dollars in cash which they are waiting to spend when they can see that conditions are improving. In fact, for the first time in history, the cash held by businesses and individuals is actually more than the valuation of the entire U.S. stock market.
At the same time, the PE valuations of the S&P are trading around 12-times earnings. That's very low and typically indicates that markets in general are undervalued. He reminds us that in 1998, PEs were at 28-times earnings and investors were still buying. Now, they're not buying at 12, but he doesn't expect that trend to last much longer.
Other issues which appear to support the coming rebound include the markets having held key support levels, TARP money coming into the system, a slow improvement in the housing and mortgage markets, the auto bailout, the Fed interest rate cuts, the debt guarantees, and growing economies of the emerging major countries on several continents.
Jenson sees all of these as indicating that the Bubble of Pessimism is close to popping. He even goes so far as to predict that we may be in for a much better ten years that the ten years we've just lived through. The S&P's total annual return right now is two-percent lower than it was in 1998. That's the worst ten-year performance in stock market history, even worse that the ten years from 1929 to 1939. He thinks there is a reasonable chance that the markets will return to more normal levels in the coming decade and, if that happens, we'll see the kind of slow but sustained growth the markets have enjoyed for most of their history, and virtually everyone is hoping he's right.
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