Friday, April 10, 2009

For the last 10 years the Nikkei 225 and the S&P 500 have followed the same path.

I have been saying for a substantial period of time that I thought the economic recovery when it comes,would.not be like most post World War ll expansions. In fact I believe that it will look more like the recovery, if you can call it that, in Japan. The chart above shows how the S&P 500 and the Nikkei 225 have been in lock step for a number years. When the market hit bottom in mid March, the S&P hit 12 year lows. In other words, if you had invested $10,000 in the S&P 500 index 12 years ago, at the most recent market bottom, your $10,000 was worth $10,000. If you adjusted for inflation through that period you really only had a value of $7,851 in 1997 dollars.

It is Springtime and hope springs eternal. The same is true for the markets; hope floats all over the street. Now is not the time to be a bear on the markets. Bears will have their day very soon and all the hope will be replaced once again with fear. It’s like the bedtime story of Goldilocks and the Three Bears. Every time she tried something like food or a bed, one was too hot and one was too cold . Finally, she found the one that was just right. One could say that the Chairman of the Federal Reserve Board and the current and most recent Secretary of the Treasury, have been looking for the right solution to our economic problems like the most comfortable bed in Goldilocks. They try something and if it doesn’t get the right response, they try something else. My guess is that sooner or later they will find the right combination of spending and incentives to start the economy growing again.

The challenge will be, can they sustain the economy over extended periods of time? I keep referring to the Japanese economy as a reference point. The Nikkei 225 was over 38,000 when it hit its high in 1985. Here we are 24 years later and the Nikkei 225 is just about 800 points below the American Dow Jones. Both the Dow Jones and the S&P 500 hit their all time highs in October of 2007, around 14,000 for the Dow and over 1400 for the S&P 500. The real market question is: will we still be waiting to set a new high in the American markets 24 years from now?

Dan Perkins




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