S&P Hits 1,000 – A Sampling of Headlines From Last Time We Saw This Level…

Welcome Back!  I have to admit that seeing the S&P 500 index back in “quadruple digit status” makes me just a bit nostalgic.  So do you remember where you were the last time the S&P closed above 1,000?  For me, the memories are a bit hazy as our twins were born October 21, and since the last time we saw this level occurred on November 4th, I was a good fortnight into sleep deprivation.

Actually the bigger question might be if you remember where you were the first day this side of 2004 when you saw the S&P close below the 1,000 mark.  The date was October seventh and being a bit of a pack rat, I still have the Wall Street Journal for Oct 8th in which the headline reads:

US, Britain Up Ante in Fight to Stop Crisis

Obviously, that fight had a long way to go as the S&P eventually dropped another 33% before hitting rock bottom just off the illustrious 666 level.  The trip down memory lane is more than just “for old times sake” – it’s important to realize just how far we have come and what issues caused (and prolonged) this financial crisis.  Here are a few additional noteworthy headlines:

Sept 13: Crisis on Wall Street as Lehman Totters, Merrill Seeks Buyer, AIG Hunts for Cash

The article explains that after bailing out Fannie Mae and Freddie Mac just one week prior, the government refused to provide a financial backstop to potential buyers of Lehman

Sept 17: U.S. Plans Rescue of AIG to Halt Crisis; Central Banks Inject Cash as Credit Dries Up

“The Federal Reserve appeared to be motivated in part by worries that Wall Street’s financial crisis could begin to spill over into seemingly safe investments held by small investors such as money-market funds that invest in AIG debt.”  I honestly don’t think that the Fed had any idea of the magnitude of what they were dealing with yet.

Sept 20: U.S. Bailout Plan Calms Markets, But Struggle Looms Over Details

The accompanying picture includes SEC Chairman Cox, Treasury Secretary Paulson and Fed Chairman Bernanke walking solemnly behind President Bush.  The “in process” treasury plan was revealed and was expected to use hundreds of billions to buy illiquid assets from U.S. Financial institutions.  Markets were “soaring” on this news but it would turn out to be just another head fake.

Sept 26: WaMu Fails, Is Sold Off to J.P. Morgan

The “biggest banking collapse in US history” brought the markets to new lows, but we were still well above the 1,000 mark.  In fact, the markets held a relatively stable line as the orderly transition to JPM was viewed as a confidence booster in the financial markets.  That confidence would all too soon be shattered.  On Monday the 29th, the whole world watched with breath held as a bailout plan was voted on by Congress.  When the “nays” took control, the market was rocked and the Dow Jones Industrial Average dropped 777.68 points – the largest drop on record.  Tuesday’s headline is below:

Bailout Plan Rejected, Markets Plunge, Forcing New Scramble to Solve Crisis

The days were dark and getting darker still.  I remember walking to a CFA meeting in Buckhead (the financial district of Atlanta) and noting just how somber everyone was as I walked through the hotel lobby and into the restaurant.  It’s amazing to think that at this point we still were nowhere near the ultimate low in the market.

Oct 10: Market’s 7-Day Rout Leaves U.S. Reeling

The sub-title reads: “Stocks in a Slow-Motion Crash as Dow Drops Another 679 Points; After Year of Declines, Investors Lose $8.4 Trillion of Wealth.”  Another headline on the same day: “As Banking ‘Fairy Tale’ Ends, Iceland Looks Back to the Sea.”  It’s no ordinary recession which sends an entire country into bankruptcy.

There are plenty of additional headlines – all with the same memories – all with the same pictures of traders, executives, world leaders and individual investors with head in hands – wishing for a recovery to begin.

Now that the dust has settled, the market appears to be functioning in a much more normal fashion.  But below the surface there are still major concerns. Unemployment continues to rise, while demand for goods drops – this leads to the familiar death spiral where falling demand causes reduced output thereby making wage and payroll cuts necessary.

But investors appear ready to embrace the positive and look past the economic shortcomings.  The question is whether this 40% plus rally is really the beginning of a new bull run, or simply the retracement of a portion of the losses from the last 18 months.  Bear markets are notorious for their sharp and extensive rallies which last just long enough to pull the most skeptical trader in – before crashing back to earth.

While many of our investments have turned in triple digit gains off the lows (and the ZachStocks Growth Model more than matched the market rebound from March through mid-June), it now seems prudent to at least use caution.  There are still many questions to be answered in regards to how we will engineer a true economic recovery, and the current administrations aversion to free markets will eventually have its price.

Today – just as in decades past – it doesn’t pay to fight the tape.  But at the same time, you can’t be lulled to sleep by a rising tide.  Eventually the fundamentals will dictate price, and the observant flexible traders will reap the greatest profits.  So here’s to 1,000 on the S&P and to your success in navigating the uncertain waters ahead!

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