Market Commentary - How the Current Stock Market Rally Compares to Prior Ones


The illustration to the left is from the May 17, 2013 Wall Street Journal. Starting from the time the current economic expansion began, a few months after stocks hit bottom in March of 2009, the S&P 500 has risen 74% through April 30th of this year. That is far better than the average 47% stock-market gain 46 months following the other 10 postwar recessions. 

However, the economy's performance has been much weaker than prior recoveries. Nominal gross domestic product has grown by just 15% in the 15 quarters since the expansion began—less than half the growth (32%)  seen at this point in the last 10 recoveries. 

Basically, in the past 10 recoveries, the stock market has advanced at a factor of 1.47 x the rate of economic growth. However, the current market rally has advanced at a rate of 4.93 x the rate of economic growth. This means the current market rally has stock prices outpacing historical measures by 353%. 

This does not mean necessarily that stock prices will fall anytime soon. However, it does show that the current stock market rally is not built upon a recovering and flourishing economy. Some analysts are saying that unless the economy starts making up for lost time and/or corporate earnings ramp up in the second half of the year, it will become harder to argue the market hasn't gotten ahead of itself. 

Millionaires are holding onto Their Cash 

A recent article from CNBC noted that today's wealthy investors seem to have split personalities. 

In a recent survey In U.S. Trust's recent "Insights on Wealth and Worth" survey, which polls people worth $3 million or more (one-third of respondents had $10 million or more), showed that 88% of respondents feel financially secure today and 70% feel confident about their financial security in the future. Also, a majority of millionaires now place a higher priority on growth than wealth preservation-a marked reversal from last year, when preservation topped growth. 

However, even in light of this confidence, the wealthy are still holding mountains of cash. The survey found that 56% have a "substantial" amount of cash. Only 16% of them plan to invest that cash in the next couple of months. And only 40% plan to invest it over the next two years. 

This may be a sign that the wealthy are confident psychologically, but cannot pull the trigger when putting their money where their mouth is. Another reason could be that the wealthy don't like paying full price (i.e., they like getting a bargain or a good deal), and they believe the current prices of stocks and bonds are not offering them the discount they normally desire. 

I can relate to this. Toan and I have been researching various investments, especially for our clients who need a monthly income. As such, we are having an extremely hard time finding investments (i.e., stocks, bonds, preferred stocks, convertible bonds, REITs, etc.)  that pay a decent yield, say over 5%, and fall into a risk level that we feel comfortable with. As such, it is becoming increasingly difficult to find investments that will allow our client to have their income, but avoid possible future volatility in their account values.     

Borrowing Money to Invest 

The May 10, 2013 Wall Street Journal noted that small investors are borrowing against their portfolios at a rapid clip, reaching levels of debt not seen since the financial crisis. The trend, driven by a combination of rising stock values and rock-bottom interest rates, is sparking a growing debate among market watchers. 

As of the end of March, the most recent data available, investors had $379.5 billion of margin debt at New York Stock Exchange member firms.

That is just shy of the record $381.4 billion in margin debt set in July 2007.

The fear is that as more investors rely on money borrowed against stocks, any significant fall in stock prices will be magnified if investors are forced to sell securities to raise cash and meet margin requirements. 

Obviously, you have to feel really good about the market to be borrowing to buy more shares at these levels, but it could also be a sign of excessively positive sentiment right now. 

As evidence that the high levels of margin debt are a warning sign, some analysts note that margin debt hit a peak at the onset of the last two bear markets. Margin debt topped out in March 2000, which turned out to be the top of the bubble. The July 2007 margin-debt record preceded the stock market's subsequent peak in October of that year. 

To some degree, margin debt reflects the movement of the stock market itself, some note. The more that stocks are worth, the more that investors can borrow.                       

Still, many say that higher levels of margin debt could ultimately magnify any stock-market selloffs, even if they are not on the near-term horizon. 

I would agree with this assessment. It is one thing to invest your principal in pursuit of higher returns. But  investing borrowed funds, even at extraordinarily low interest rates, is not something I recommend nor is for the faint of heart. Because paying off that debt could lead to forced selling, and when the air comes out of the bubble, the situation can be negatively compounded on the way down (i.e., incurring investment losses to pay off a debt). 

A Poem for all Drivers, Especially new ones 

Below is a poem that a client shared with me this week. His desire is that others would find it impactful and hopefully help prevent injuries from car accidents. 

Since the school year is coming to an end, the summer driving season is upon us, and I have a nephew who is of driving age and will be getting his first car in the upcoming weeks, I thought the following poem would be helpful reminder of what we face when we and/or loved ones are behind the wheel. 


As I head into the world of Four-Wheeled Killing Machines

may I be conscious of the following “May Nots”!

I MAY NOT drink and drive but others may!

I MAY NOT take drugs and drive but others may!

I MAY NOT be distracted by texting and cell calls but others may!

I MAY NOT be late or in a hurry but others may!

I MAY NOT jump the traffic lights but others may!

I MAY NOT fail to look ahead but others may!

I MAY NOT drive reckless on slick roads but others may!

I MAY NOT defy traffic signs/signals but others may!

I MAY NOT have the radio loud but others may!

I MAY NOT drive with bad brakes or equipment but others may!


From an ole driver who cares you become one someday! 


Memorial Day Weekend 

When celebrating the Memorial Day weekend with friends and family, please take time to remember those brave men and women who've been injured or given their lives in servicing to protect our country.



I've learned that everyone wants to live on top of the mountain, but all the happiness and growth occurs while you're climbing it.


 "Today is your day! Your mountain is waiting. So... get on your way.

                   Dr. Seuss 

Winners take time to relish their work, knowing that scaling the mountain is what makes the view from the top so exhilarating.

                   Denis Waitley


Tony Moeller, CPA


The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only.  It is not a recommendation or solicitation of any particular investment or strategy.  A risk of loss is involved with investments in the stock and bond markets.  

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