The Market Has Voted
August 29, 2004
The market has gently floated upwards for about two weeks and again I could not find anything bad to say. Yep, yet again, you know there is a rally going on if my missives have gone into hiatus. I am TRYING not to let my bearish bias show too much, but it is obviously easier said than done.
Anyway, I thought I would finally take some time to share my unique observations now that I hear the rest of Wall St. is running away from NYC in front of the Republican National Convention. I found this behavior odd because it seemed to me that the market was more scared of the Democratic National Convention than the Republican one. The Demos started getting busy on July 26. Prior to that, it felt like the market was down every single day in July! Indeed, The S&P fell from a close of 1140 on June 30th to a close of 1086 on July 23rd - a nasty 4.7% drop in a little less than 4 weeks. The Dow fared just as poorly and the NASDAQ even worse (it lost 200 points for a near 10% drop!). Talk over the air was thick and heavy with foreboding of a potential terrorist attack during the Demos' lovefest in Boston. And as these things go, the market chose to STOP selling off and put in a temporary bottom the very day the convention began. Typically, such behavior indicates that nearly everyone who wanted out beforehand had already left the building…only the few brave buyers were left to float the market back up a bit for the rest of that week. And wouldn't you know it? The major indices topped out that Friday and Monday before resuming July's nasty downdraft. We should take a pause to note well that the folks drifting the market upward DURING the Demo convention witness not a single terrorist event, rumored or otherwise.
Now, just when we think the market is getting jittery about terrorism fears again ahead of the Olympics and the Republican convention, we find a more convincing bottom (albeit lower than July's). So NOW, we have been in rally mode for a whole two weeks BEFORE the Republican convention. Granted that the major indices have only clawed there way back to levels last seen during the "Demo rally," but I find the difference in pre-convention behavior more than just curious, interesting, or striking. I will go so far as to say that the market has placed its vote of confidence in the Repubs. At the very least, the market seems to believe that the Repub's credentials and "expertise" in fighting terrorism is more reassuring than that of the Demos. The more cynical (twisted, take your pick of adjectives) might instead suggest that the market cares MORE about the potential of terrorism during the Demo's convention, but you sure would not get ME saying something like that. Regardless, we should take a pause and note that last week as a story in Russia unfolded that two jetliners were downed by Chechen bombs, the U.S. market hardly blinked. The market reacted negatively (albeit briefly) to the Madrid bombing, but not this one? What does that say? Certainly, Americans are not fearing retribution from Chechen rebels, but if the Russians cannot protect their own jetliners does that say anything about our own safety? I sure hope not. We also were confronted with a potential reconnaissance mission in Maryland by an alleged Hamas member. He and his family were caught filming a bridge under suspicious circumstances. The story is still unfolding, but yet again the market hardly blinked. Yet, did not the market get wobbly after Ridge and company hiked up the alert levels again after discovering that several financial institutions had been cased by al-Qaida several years ago?!? Perhaps the market cares more about its own than a lonely bridge "way out" in Maryland. However any of this turns out, I find the market's blasé attitude last week about it all more evidence that the market only cares about these myriad terrorism threats when it feels like caring. They are easy excuses for explaining away market sell-offs, but by themselves will rarely be enough to explain much (recall that the market was tanking fast BEFORE 9/11 and just a few short weeks after it, the market soared quick, fast, and in a hurry).
All in all, I think our worries and concerns about terrorism are much too short-sighted. While we are worrying about the color of the week or month for the terror alert, some of these terrorists are counting grudges all the way back to the Crusades of the early centuries of the second millennium! We have nuclear weapons slowly but surely spreading their way across the globe. It seems to me our "threat matrix" needs to extend out ten, twenty, even 100 years.
Anyway, I will fully recognize that this exercise of transforming correlation into causation is fraught with potential for error and much disagreement. You can even find subtle contradictions within the tales I told above. Indeed, a lot of other cross-currents have happened during the past two months: oil worries, economic worries, good and bad earnings reports. You name it. But I personally find the timing of the market moves around the conventions the more interesting story here. Now that everyone who wants to buy has bought ahead of the Repub convention, we should see the market drift back downward from here? Stay tuned…