What’s Fueling the Stock Market Rally?
“A billion here, a billion there and pretty soon you’re talking real money.”—unknown, though often ascribed to Sen. Everett Dirksen
At first glance, the title of today’s piece is pretty silly. We all know what’s fueling this rally—lots and lots and lots of free money. The amount of money sloshing around has gotten so absurd that it makes Senator Dirksen (or whoever coined the phrase from our opening quote) look like a piker.
CNN has a nifty little ongoing web page called the “bailout tracker.” A note of warning: The site is not for those who suffer from weak stomachs, heart conditions, or free market tendencies.
As of September 9, the current number of taxpayer dollars actually spent was up to $2.8 trillion. Scarier still is the fact that $11 trillion has been committed, but not yet spent.
Even though I suspect we have all grown numb to huge monetary figures, those are truly staggering sums. Consider that only five countries in the world (i.e., the US, Japan, China, Germany and France) have a nominal Gross Domestic Product (GDP) higher than $2.8 Trillion. And only the US, at around $14 trillion, has a GDP higher than the committed funds level.
Again, back to the $2.8 trillion figure—that’s a staggering amount. That’s enough money to buy a Porsche Boxster for every man, woman and child in California and Texas (our two most populous states) and also one for everybody in Wyoming, Washington D.C., Vermont, North Dakota, Alaska, South Dakota, Delaware (yeah!), Montana, Rhode Island, Hawaii, New Hampshire, Maine, Idaho, Nebraska, West Virginia AND New Mexico.
Enough said. It’s a whole lot of money.
With that kind of money flowing through the system, it makes sense that a good bit of it would go to the stock market and all that buying would help raise stock prices.
But is this just anecdotal thinking, broad based macroeconomic drivel, or is it a truly viable explanation for the market’s strength over the last 6 months? To test the theory, I conducted a wee bit of research…
Relative Sector Strength: Show Me the Money
Let me cut right to the chase: If bailout bucks really are driving the stock market’s recovery, then we should see the biggest percentage gains in the sector that’s received virtually all of the cash—the financial sector. If not, then the financials will look more like the broader market. Let’s go to the charts.
This chart is one of the handy “Performance Charts” from the folks over at StockCharts.com. It shows the percentage returns across a broad spectrum of sectors from the March 9th lows until now.
It should come as no surprise that the dark red line on top represents the financial sector, which has enjoyed a whopping 138% return since March versus the 56% return for the broader market (S&P 500) over the same time frame.
A more telling chart is shown below; there you’ll see the same broad sector list graphed according to return, relative to the S&P 500 over the time period. (In other words, a sector that was identical to the S&P 500 would vary by 0%; a weaker sector would be negative, and a sector that’s stronger than the S&P 500 would be positive).
Here we see that the technology sector is even with the S&P. Four sectors are grouped in a significantly underperforming clump (i.e., energy, utilities, consumer staples and health care). Three sectors outperformed the broader market by a good bit (i.e., industrials, materials and consumer discretionary). And then there’s the outlier: the good old financial sector.
The distortion in the market is clear. The best we can hope for is that the “bailout bubble” has a relatively smooth landing when it bursts. But remember that the markets can certainly stay irrational for a long time when irrational amounts of money are being printed.
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