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Happy Anniversary

Today is the one-year anniversary of the 12-year low in the stock market reached on March 9, 2009. The S&P 500 had crashed to a hellish 666 level. A lot has changed over a year, and that includes the factors that have supported the recovery in the equity market (thanks to David Rosenberg for the data points below):

• The market’s measure of fear, the VIX, was 50, not 17.
• The yield on the 10-year Treasury note was 2.9%, not 3.7%.
• The budget deficit was $900 billion, not $1.5 trillion.
• Credit Spreads were 540bps and tightening, not 260bps and widening.
• The Dollar Index was at 90 and depreciating, not 80 and appreciating.
• Oil was at $47/bbl, not $82/bbl Equity PM cash ratios were at 5.5%, not 3.6%.
• Market Vane bullish sentiment was at 32%, not 53%.
• Real GDP was -6.4%, not +5.9%
• The ISM Manufacturing Index was 36, not 57

These pieces of data show that we have come a long way, but nothing shows it clearer than the chart at the end of this Investment Commentary. The chart reflects the market peak in October, 2007, at 1,565 on the S&P 500 Index moving down to the 666 low on March 9, 2009, and the subsequent recovery to today’s 1,138 level. The size of this move from the lows represents the biggest up-move in three-quarters of a century. You can also see that we have recovered a bit over 50% of the entire bear market drop from peak to trough.

The real question now is whether the economy is recovering enough to push the market higher, particularly to our 1,250 level on the S&P 500 which we’ve written about as the anticipated top of the trading range for this stage of the economic cycle. The primary factor in support of higher stock prices are low interest rates and an easy monetary policy by the Federal Reserve. The primary factor that could derail the recovery and send stock prices down are higher interest rates and the Federal Reserve tightening monetary policy. Right now, low interest rates are here to stay (at least for several more months), so the trend should be up. However, if the market gets wind of a move to a hawkish stance by the Fed, we could easily see a correction but it would take a major economic event to move us down to the previous 666 level.

Our strategy for now is to maintain our stop losses (many of which hit during the recent sell-off) and use any cash generated to reposition our portfolios as our Investment Strategy dictates. We will be sending out a full Investment Strategy newsletter in a few weeks that will detail for you our plan for the future. For now, we are staying with our plan to ride the uptrend and protect the downside with stop losses.