Déjà Vu Rally

The S&P 500 bottomed out on March 9, 2009 after falling 57% from its peak in October, 2007. We sincerely hope the March low will prove to be the final bottom in this ugly bear market. In any case, stocks have risen steadily since that date, with the exception of one seemingly minor pullback of about 7% between June 12 and July 9. A closer look at this 7% pullback, however, may reveal some interesting details. Faithful readers will recall our concern about the negative effects of sharply higher interest rates and oil prices on the economic recovery (and stock prices). As stocks rose rapidly during the months of April, May and the first part of June, we cautioned that oil and interest rates had been rising rapidly as well. On June 10, the yield on the 10-year Treasury reached a high for the year of 3.95%. Just a day later on June 11, the price of oil reached a yearly high of $72.68 per barrell. And a day after that, the S&P 500 began a “correction” that would end roughly a month later after a 7%+ decline.

During the course of this month-long 7% correction in the S&P 500, the price of oil fell 18% and the yield on the 10-year Treasury fell 16%. But what is interesting is that all three metrics reversed course yet again within a couple days of each other. Treasury yields resumed their upward climb on July 13 and have risen from 3.30% to 3.72% today. Oil reversed course on July 15 and has climbed from $59.52 to $71.84 today. And the S&P 500 is up 14% from July 10 and now stands at a cool 1,000.

This month-long “correction” period described above is represented by the shaded area in the graph below. The chart gives us historical oil prices, 10-year Treasury yields, and the S&P 500 beginning at the March 9 low for the S&P 500 and continuing through today. Each metric has been indexed beginning with a value of 100 assigned to each respective value on March 9.

The S&P 500 now stands 6% above the level that triggered the 7% sell-off in June. Meanwhile, oil prices are now very close to their highs for the year, and Treasury yields remain off the yearly highs by about 0.25%. Has the market gotten ahead of itself yet again? What will be the implications of sharply higher oil prices and interest rates for the economic recovery? Can stocks continue an upward trend in the face of rising finance and energy costs? On a more anecdotal level, individual investors are telling us that they are ready to own stocks again. Contrary indicator? Only time will tell the answers to these questions.

oil-vs-sp500-080509

Peace,

Michael