As any gardener will tell you, healthy lawns hardly ever have weeds in them. This is because when a lawn is healthy, it is lush and thick and weeds don’t have a chance to grow. Weeds only show up in a lawn when there is something wrong with the underlying soil or lawn. If the lawn is unhealthy or the soil isn’t providing the right nutrients, weeds have a better chance of germinating and propagating throughout the lawn.
There has been some talk of green shoots in the economy lately and the stock market has certainly been doing its part with the S&P up over 30% from its March lows. There seems to be some optimism out there and people are starting to talk like the worst recession since 1930 might end in a V rebound to prosperity. The question is, are the green shoots really a healthy lawn rebounding after a cold winter or is the lawn dead, the soil useless and thus what we’re seeing are essentially weeds?
I’d argue we’re getting awfully excited about a bunch of dandelions. All of this excitement is almost certainly wishful thinking and the people pouring money back into the market right now are likely to be very disappointed come summer when it gets hot and the weeds shrivel up and die. The data over the past 3 months has been overwhelmingly negative yet because the “stress tests” our esteemed government ran on the banks came out positive (ignoring the fact that there was no negative option, it was set up as win-win), the market has acted as though nothing bad was going on. S&P earnings are down an unheard of 90% over the past 20 months, unemployment continues to rise and we’re about to go through the bankruptcy of two large automakers in the US. There is a pending disaster waiting in the wings of commercial real estate and foreclosures are increasing while home prices continue to fall. The state of California may go bankrupt or our federal government will be forced to bail them out, either outcome leading to a ripple effect throughout the economy.
Every bear market has runs of 20-30% that trick people into putting money back in at the highs before crushing their hopes of a recovery by testing new lows. We may not see the lows in the S&P that we saw back in March but I have serious doubts that the run up we have recently seen is sustainable given the overall severity of the recession we are in.