How're we doing in the Stock market, May 2013

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Is the stock market booming? Few people agree that we're in the middle of a terrific boom. Objectively, an average holder of stock (see SPY chart below) is in a position quite similar to the peak of the dot.net boom or the housing boom.

Yet, even people with their 401(k) fully in stock funds don't feel it emotionally -- we have the same number, but none of the excitement and enthusiasm.

Leading up to the dot.com top, a lot of people were wondering if the ride would end. Yet, the feeling was different from now. Today, it feels like there really has not been that much of a ride.

Is the economy booming? I think the main reason for the lack of enthusiasm is that the economy -- in real terms -- has lagged behind the stock-market.

This chart overlays Real per-capita GDP on top of the SPY chart. Notice the year 2000. You see a pause, and then GDP started to rise far past the previous peak. Meanwhile, today per-capita real-GDP is not yet back to the last (housing-boom) peak.



Total employment tells a similar story. The employment picture is actually worse than this chart shows, because we ought to adjust it downward for the growth of population.



Are we near a peak? The chart above may beguile one into seeing a pattern where we are approaching the peak of a third hill. So, it is only fair to show a longer-term chart of the Dow, reproduced from stockcharts.com

Notice how the stock-market went sidewards between (approx.) 1964 and 1988, and yet shot up right after.

If we're due for a large correction, it is not merely from the repetition of a pattern. It is more likely to come from disappointments in corporate earnings -- as John Hussman has been arguing.

Different motivation: The dot.net boom saw shareholders excited about their companies. The housing boom saw them generally flush with credit and happy about their net worth. This time, resignation seems to be driving people into stocks: because the Fed has lowered rates to a point where nothing else pays. It's not a party: motivation by carrot has been replaced by "motivation" by stick. I may not matter though: either way, if people are driven to do something they would not otherwise do, that sets the stage for mal-investment. The dot.coms have been replaced by "high-yield" stocks.

Parties can last. I'm not calling the death of the market boom though. Consider how long it took for people to lose faith in the equality of all EU sovereign credit. At any rate, if one wants to bet on a central bank's game falling apart, the FED (and the U.S.) seems a poor target. It would all make for an interesting tale, if it wasn't my savings on the line!

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