Stock Market Deja Vu: Why It Feels Like 2011 All Over Again

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Brendan McDermid / Reuters

A screen shows the Dow Jones industrial average after the closing bell on the floor of the New York Stock Exchange, Feb. 21, 2012.

Last year was a rollercoaster ride for the stock market. In 2011, the Dow Jones Industrial Average raced to a high of 12,810 in April before skidding to 10,404 in October. Then, in the final three months of the year, the Dow surged more than Rick Santorum on the campaign trail – adding a record 1,304 points, or almost 12%.

Now it looks like we may be in for more of the same. Market guru David Rosenberg makes a persuasive case to his private clients that 2012 bears a striking — one might even say eerie — resemblance to 2011. “Just about everything is mapping out last year’s manic behavior,” writes Rosenberg, chief economist and strategist for investment manager Gluskin Sheff & Associates in Toronto.

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Rosenberg is a guy worth listening to: The former chief economist for North America at Bank of America-Merrill Lynch was named the most accurate forecaster by MSNBC and economist of the year by Fortune magazine in 2011. I’ve been reading his highly influential daily email, “Breakfast with Dave,” for years. Here are some of the most compelling reasons to think 2012 could be 2011 redux:

Extraordinary levels of central bank support: In 2011, the stock market was living off the “fumes” from a special Federal Reserve Treasury bond-buying program, known as QE2. Some of the money the Fed released into the economy ended up in the stock market. Similarly, in 2012, the European Central Bank lent gobs of money to the banks at yearend in its own special lending program (dubbed LTRO), fueling markets so far as well. Why is that problem? When the flood of money from the central bank spending spree ends, the stock market is likely to falter, just as it did last year.

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Dow Transports are starting to sputter: Most people keep an eye on the Dow Jones Industrials. But those in the know also keep an eye on other Dow indexes like the Transports as an economic bellwether. It includes companies like Fedex, whose fates are closely tied to the health of the economy. Last year the Transports weakened before the broader stock market. Shades of 2011: The DJIA just embraced 13,000, but the Transports are down 4%. 

Treasury bond yields are ultra-low: Then, as now, the 10-year note remains stubbornly below 2%, another indication investors are betting on a weak economy. Indeed, in his testimony before Congress yesterday, Fed Chairman Ben Bernanke said growth would be modest, hampered by the depressed housing market and turmoil in Europe. Modest growth does not typically translate into improving corporate earnings—or an exuberant stock market.

Stock volume is low: Both in 2011 and 2012 the trading volume in stocks has been thin, which means that not all that many people are saying, yes!, we love the market. When volume is thin, prices swing much more wildly, giving the market a rollercoaster feel. 

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Oil prices are gaining: Early in 2011 the jobless picture began to improve only to get slapped with higher gas prices and political uncertainty. Sound familiar?

Confidence is suspiciously high: Ready for another encounter with déjà vu? In February 2012, the Conference Board measure of consumer confidence measure unexpectedly jumped to 70.8 from 61.5 in January. Ditto February 2011: The survey unexpectedly shot up to 72 from 64.8. If that isn’t uncanny enough, Rosenberg notes that bulls now outnumber bears two-to-one. Last year the bull-bear ratio was nearly identical early in the year and presaged the market peak. When bears finally outnumbered bulls in October, the market bottomed. Beware the wisdom of the crowds.

Markets, of course, never shoot up without some pullbacks. But if investors are expecting a smoother ride for stocks in 2012 the signposts Rosenberg is training his lights on are saying not so fast! A ticket to the stock market this year might feel like a ride on the Coney Island Cyclone. Get ready for some heady highs and stomach churning dips.

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