S&P 500 closed at 942. Looking at this graph below shows similar kind of drop and retracement after the technology bust. This retracement in the S&P is due to benign low interest rate regime that kick started. The question is will this rally sustain?
Let us examine few things that have lifted in 2002. At that time long term interest rates were at 5% levels. Govt and individual balance sheets were not leveraged. Globally, China and India started showing leadership in manufacturing and service sectors. This has lead to capping the price levels for various products. In this kind of world a busted economy needed fuel of low interest rates and markets have rallied to their heights. Fast forward to today. We are already in low interest rate regimes. Fed fund rates is at 0-0.25% range. Consumer balance sheets are deeply leveraged and resilient consumer is in the process of deleveraging. Government has taken the role of lifting the economy by creating enormous deficits. China and India are displaying signs of growth in response to government programs.
This gives a clear indication that any kind of monetary or fiscal medicine at this point of time is sheer wastage of resources. What needs to happen is deleveraging to reach equilibrium point. Till then we have two things that will play. One is uncertainity and second is dead cat bounces.
By end of June S&p 500 should stay around 900 or trend lower.
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