From the August 01, 2009 issue of Futures Magazine • Subscribe!

Equities outlook: A new bull cycle?

When the market showed a tendency to positively react to even the tiniest bit of evidence that the rate of economic decline might be slowing, the bulls coined two phrases in an attempt to explain the phenomenon. They said a “slower rate of down is now the new up” and “the less bad is now the new good.” Many of the recent economic reports at the time continued to show weakness, but the rate of decline appeared to be beginning to slow. In spite of a substantial recovery in all of the major stock indexes since the March 6 lows were made, experts remain split on whether this low water mark for the move will be the ultimate bottom. It was also in March that the term “green shoots” was first popularized as a way to describe any ray of hope for the economy. This term originally was used by Federal Reserve Chairman Bernanke when he was interviewed on “60 Minutes.” When asked about the state of the economy, he said he detected “green shoots” of economic recovery. Specifically, he said “we’ll see recovery beginning next year and I think as those green shoots begin to appear in different markets, and as some confidence begins to come back, that will begin the positive dynamic that brings our economy back and it will pick up steam over time.” Since that interview, any news or event that contained any hint of recovery was used to advance the argument of those favoring a better economic outlook and higher stock index futures.


When stock index futures made their lows and even through much of the recovery, the fundamentals could not have been more bleak. The bears seemed to have all of the good arguments on their side. In spite of this, stock index futures were able to ratchet higher in an atmosphere of horrendous fundamental news, along with overwhelming bearish sentiment and market commentary. According to the bears, the sharp price gains for the indexes since early March could not be justified by the fundamentals. In their opinion, the recovery gains would be short lived and would be followed by another new leg down to new lows for the move. There were a variety of fundamental factors that the bears cited for their pessimistic views and they all sounded very plausible. They advanced the argument that the multitude of stimulus and bank bailout plans would adversely affect the federal budget, while not being sufficient to jump start lending. Restrictive lending practices, along with the widely held view that home prices would continue to decline, kept many potential buyers out of the housing market. This problem became more apparent after a Federal Reserve report stated that a majority of U.S. banks actually made it more difficult for consumers to get credit in the previous quarter, even though financial institutions received very large injections of federal funds. It was widely feared that the housing recession would be the worst since the 1930s and, at the time, there appeared to be no end in sight.

Due to an environment of rising unemployment, there was a growing feeling that consumers would have a difficult time getting credit lines and loans for months to come and that this condition would not be remedied anytime soon, in spite of the variety of government assistance plans. A Federal Reserve study showed that approximately 70% of U.S. banks had actually tightened their lending standards for small businesses. This fear was addressed by credit card companies through their efforts to limit lines of credit and cancel credit outright, which further encouraged the bears on the market.

Providing additional ammunition for the bears was the fact that it was becoming very much in vogue for economists to downwardly project GDP estimates for the balance of 2009. This negative outlook remained even though the fourth quarter 2008 GDP showed better than forecasted negative growth of “only” 3.8%. That this was the largest decline since 1982 tended to exacerbate the negative feeling about the economy and the prognosis for stock index futures. The growth expectations for the first quarter 2009 were anticipated to be negative as well. Analysts were no longer just talking about a recession but a depression.

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