The Third Pig

Last month I posted and videoed about whether or not we were in a bull market based on five market indicators. I said that one way to tell if we’re in the beginning of a bull market is to try to ascertain whether or not we had seen a bottom. I concluded that we had seen a bottom in the market (November 20th, 752 level in the S&P 500) and that we’re in a new bull market trend. Today I’d like to look at another three:

1. Worst GDP decline in 25 years

On January 30, 2009, the BEA reported that GDP shrank 3.8% in the 4th quarter of 2008 (chart below). This was the worst showing in 25 years. The last time the economy shrank this severely was the 1st quarter of 1982. What did the market do the day these figures came out? It declined 2.2%, falling from 845.1 to 825.9. Not much of a move considering the news.

2. Job losses skyrocketing and unemployment trending toward double digits

February 5, 2009, the Labor Department reported 598,000 were lost bringing the total since the beginning of 2008 to 3.6 million. The unemployment rate went up to 7.6% making it the highest it’s been in decades. What did the market do that day? It went up 2.7% from 845.9 to 868.8.

3. Market price to GDP ratio

Back in 2001, in a Fortune magazine article Warren Buffett presented a chart comparing the total market value of U.S. based business as a percentage of GNP. An update of that chart is presented below. In the article Buffett said, “If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you." Currently this ratio sits below 75%.

I compared the market value of U.S. equities using the Wilshire 5000 index which comprises all stocks traded on the major exchanges in the U.S. I then compared it to GDP, a decent proxy for GNP. At the November 20th low, the percentage relationship between the two figures was 64% (Wilshire 5000 = 7.4 trillion and GDP = 11.7 trillion) and by the end of December remained below 80%.

Even if the market breaks through the 800 level, which who knows, it might, I am still on the side of this being a new bull market.

Disclosure: I and the clients of Brick Financial Management, LLC are own shares of iShares S&P 500 Index ETF but positions can change at anytime.