Strategies: Stock Market Keeps Ignoring Washington’s Gloom

Since March 2009, the Standard Poor’s 500-stock index has risen 125 percent. This year, the S. P. 500 hasn’t fallen for even a single week.

Irrationally or not, some investors who were on the sidelines have become emboldened enough by the rally to start buying stocks, fund flow data shows.

Yet this effervescence belies some ominous developments in politics and the economy. After the State of the Union address by President Obama on Tuesday — and the negative reaction to it among many Republicans in Congress — it seemed quite possible that $1.2 trillion in automatic government spending cuts might begin in just a few weeks, delivering yet another blow to an already lackluster economy. Most economists had expected minimal growth this year, even without a new shock from Washington — or from Europe or anywhere else.

These apparently conflicting pictures pose a quandary for market strategists. Which signals should an investor emphasize: the signs of disharmony in Washington and the negative indicators for the economy, or the upward trend of the stock market?

For Laszlo Birinyi, the veteran strategist and longtime market bull, the contest isn’t close. He says he starts by assuming that the market is smarter than any analyst. “We focus on the market itself, on what it is actually telling us,” he said. “We don’t worry about the cosmic issues that a lot of people get concerned about, We worry about the stock market ticker. And it’s telling us the market is going up.”

In September 2009, when very few strategists were overtly bullish, Mr. Birinyi, president of Birinyi Associates, the stock market research firm in Westport, Conn., told me that we were in the early stages of a classic bull market. That analysis was prescient. The S. P. 500 has returned more than 50 percent since then.

In a conversation last week, he said we were in the final stage of that bull market. “The bull market probably has between a year and three years to go,” he said. “I can’t time it. I can only point out the trend.”

Mr. Birinyi, formerly chief stock market analyst at Salomon Brothers, uses a combination of quantitative and subjective analysis. He carefully meters money flows into and out of stocks and scours business coverage in newspapers and magazines, which he sees as barometers of popular sentiment.

Money flow, as he measures it, comes from an algorithm he devised at Salomon. “Trades made on a price uptick are treated as buyer-initiated,” said Jeffrey Yale Rubin, director of research at Birinyi Associates. “On a downtick, it’s seller-initiated.”

As Mr. Birinyi puts it, “we care about what traders are actually doing with the money.” Mutual fund flows are widely tracked, he said, “but they aren’t as critical as most people generally think.” They tell you how much money is being given to a money manager — an intermediary. “The critical issue is how that intermediary is actually using the money,” he said.

The firm’s calculations indicate that in January, net money flows into the stocks of the S. P. 500 — as opposed to money flowing into mutual funds — amounted to $15.6 billion. This compares with a net outflow of $10.4 billion in October, just before market sentiment began to change.

Based on the history of long bull markets — particularly those of 1962, 1974, 1982, 1990 and 2002 — such upswings usually have four stages, Mr. Birinyi said. They begin with reluctance, shift to consolidation and then move to “grudging acceptance.” The last phase, which he says we have just entered, is exuberance: “This is a point where people say, yes, the economy isn’t going into recession right away, companies are making money, interest rates are not going through the roof, and all the concerns we have had for some time perhaps were too negative.”

He says it’s as if people are realizing: “The market isn’t like the New York subway system. There isn’t another train coming right after this one. This is it, this is the last train. You’d better get on board.”

Article source: http://www.nytimes.com/2013/02/17/your-money/stock-market-keeps-ignoring-washingtons-gloom.html?partner=rss&emc=rss