Second Half For Stocks Could Be Very Good

As we head into Memorial Day weekend and stocks (S&P 500) have crossed back over into positive territory again for the year, we want to step back and acknowledge the relative calm in global markets and economies, compared to where we stood just three months ago, and talk about how different the second half is setting up to be.

Remember, just three months ago the S&P 500 was down 11.4%. Small cap stocks were down 17%. When stocks go lower, people predict crashes.  They did.  Oil was trading $26 and some bold people were predicting much lower – and lower for a very long time.

Sure, the world was a scary place when oil was $26.  But we had a binary outcome on our hands.  If oil continued to go lower, and for much longer, the energy industry was done, and the dominoes were lining up. We faced another wave of global economic and financial crisis that would have made the “great recession” look modest.

But if you stepped back and weighed the probability of the outcomes, the evidence was clearly supporting a recovery, not another date with global disaster.

Just days prior to February 11, when oil and global stocks bottomed, we said “a rigged oil market has the ingredients to undo all that the central banks have done for the past nine years to get us to this point. With that, we expect that, as intervention has stemmed the threat of everything that could have derailed recovery up to this point, intervention will be what stems the threat of the falling oil and commodity prices threat.

The central banks manufactured a recovery from the edge of disaster in 2009.  They went “all-in.”  It would be illogical to think they would sit back and watch it all undone by an oil price bust, one that was orchestrated by OPEC in an effort to crush the competitive shale industry.

We already knew how far the world’s biggest central banks would go to preserve stability (perhaps civilization).  They would do pretty much anything — “whatever it takes” in their own words.

So what marked the bottom for oil?  Not surprisingly, it was intervention.
If we fast forward to today, with the trend of positive surprises in European data leading the way, it’s fair to say the state of global markets is getting closer to good.

What does that mean for stocks?

If we look back at 2010 we can see a lot of similarities.  Stocks were hammered in the first half of 2010 by the potential default of Greece – and for energy stocks, the oil spill in the Gulf.  The macro clouds were removed, and in the second half of 2010, the S&P 500 rallied from down 7% to up 15% by year end.

The Russell 2000 was down 6% for the year through July of 2010.  Over the next five months it rallied 34 percentage points to finish UP 27% on the year.

What about energy?  After being down 12% in the first half of 2010, the XLE (the energy ETF tied to a basket of energy stocks) returned 34% off the bottom and 22% for the year.

Also remember, in Fed tightening cycles, stocks tend to go UP not down. We’re officially five months into a Fed tightening cycle stocks are basically flat.

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