Stock Market Up 60% From Last Year: Who Predicted It?
One of the great fallacies economists sometimes have is that they can predict the future. I fall into that trap too. As a scholar of the dismal science we are taught the machinations of the economy and at the end of the day many of us think we can put two and two together. So how many economists predicted there would be a 60% rise in the TSX and the S&P 500 since last year? Nobody.
At the time of the major market meltdown in the late fall of 2008, I was grasping at straws for knowing what to do. For instance when Lehman Brothers went down it was so stunning I was wondering out loud if Canadian banks were at-risk. I think I was right to think that but the best prediction I can put out was we might see some economic recovery in late 2010. I certainly didn’t have the chutzpah to say we’d see a 60% rise in the stock market from its low last March.
The Dow and the S&P 500 are up 61 and 68% respectively from their bear market lows last year. The NASDAQ comp is an index is up approximately 80% from the bear market lows. It almost makes you wonder if we have learned anything from that dark time in 2008 when everything went to smithereens? Is it time to sell? Let me be the first one to say I dunno.
Much of this is simply mathematical gymnastics. For instance the depth of the losses last year were so great that when you measure against that almost anything looks good. For instance the TSX is now at 11,964 and at its bull market height in early 2008 it was at 15,073. So if you look at it that way, we still have a very long way to go. Getting to the top of the mountain is always harder than falling down the hill.
Of course trying to put a bad news spin on this doesn’t work either. In the last quarter of 2009 the Canadian economy grew at a 5% annualized growth. That is smoking folks. If you have read this column on a regular basis you will know that we commonly talk about economic growth rates of one and 2% and are happy to have those. So it looks like the economy at least in Canada is back in spades and the stock markets are a reflection of that. I just hope we learned our lesson back in the day when we lost it all.
If you were to ask Stephen Harper and Dalton McGuinty if this is good news, I’m sure they would be grabbing for the microphone. A year ago when they both launched their stimulus package I was in agreement as an economist at pumping money into the economy was the right thing to do. My belief was that if money was pumped into the economy it could be used to stimulate aggregate demand. This would jumpstart the economy, cut short the recession and get the private sector up and running again. So now we see these bigger economic numbers, I think it worked this time. Interestingly enough much of the stimulus funding is still flowing and will flow until late 2010. Key for our governments is a sustained economic growth after the stimulus comes to an end.
Of course what these two levels of government have done recently is have a throne speech laying out their blueprint for the future. In the case of the federal government they have one more year of stimulus funding and then the cuts are going to take place. In the case of the provincial government they have similar plans but they are launching a new thrust in education and mining. They are starting a online University and creating 20,000 more postsecondary education spots in Ontario’s colleges and universities. In addition to that they are developing Northwestern Ontario’s “Ring of Fire “, which is a large area of some of the richest chromite deposits in the world. It sounds like there has been some innovative planning somewhere along the road.
So what is the road ahead? Well, as an economist let me assume the world will never change in the next five years. LOL. That is exactly the point. Sometimes being an economist means you have to think big and while trying to hit the economic bull’s-eye, sometimes you just get things close to the right direction. Are we going that way? I dunno. However, in the great scheme of things it looks like a pretty good start.