This month in Marketimer, Brinker again reviewed all five of these "root causes of a bear market" and said they were all still negative. He predicts that the cyclical bull market will continue at least for the remainder of 2011. Let's see if we come up with the same conclusion:
1. Tight Money
As of July 2011, the Federal Reserve is continuing its highly accommodation monetary policy. The Fed has a dual mandate to pursue policies that maximize the level of employment while maintaining price stability. The Fed defines price stability as a rate of core inflation below 2%. The year-over-year personal consumption core price index is 1.2%, and the CPI is 1.5%. Unemployment is 9.2% and under-employment is over 16%. Brinker thinks that it is unlikely that the Fed will tighten monetary policy "until 2012 at the earliest."
Nope, no tight money on the horizon as long as the Fed likes the inflation numbers.
2. Rising Rates
On Moneytalk, Brinker said: "What's another root cause of a bear market? No question, rising interest rates. I'm not talking about the federal funds rate going from 1 to 2. I'm talking about a meaningful rise in interest rates...."
Since the Fed is not likely to raise short-term rates until the economy grows sustainably above 3% and is accompanied by inflation pressure, Brinker expects the "FOMC to hold short-term rates at the 0% to 0.25% level at least until 2012."
Nope, no likely rising rates on the horizon as long as the economy is growing at such a snail's pace.
3. High Inflation
On Moneytalk, Brinker said: "What's another root cause of a bear market, a decline in excess of 20% in the S&P 500......No question about it, Hyperinflation, rising inflation. Do we have that? No. I know there are a lot of people out predicting it, but they've been wrong."Is there any inflation right now? Brinker claims that the principal driver of inflation is wages/salaries and that right now, labor costs are benign and showing very little movement. At the same time, productivity gains are supporting corporate profit margins. Brinker also believes there has been a recent decline in commodity prices and that capacity utilization is below the 40-year average of 81%, which provides a safeguard against demand-pull inflation forces.
Nope, there are no prospects for high inflation based on these fundamentals.
4. Rapid Growth
On Moneytalk, Brinker said: "What's another cause of a bear market. At the root, it's rapid economic growth and a boom in the economy -- the economy is roaring ahead.
Brinker sees no prospect of rapid growth anytime soon and forecasts a real GDP growth at 2 to 3%, with the first-half close to the low end of that range. Brinker even expects to see additional fiscal stimulus measures in the second half of 2011, especially the extension of the 2% reduction in the employee portion of the payroll tax.
Nope, doesn't look like any runaway rapid growth ahead -- just the opposite, there may be more government stimulus.
5. Over-valuation
Brinker's estimate of fair value for the S&P 500 Index based on 2011 operating earnings estimate is $93.50 -- 15 times earnings. This equates to S&P low-to-mid 1400s price range for the index. Brinker believes the market is currently under-valued based on earnings prospects. Price/earnings ratios factor many variables into the equation, and Brinker uses the historical 15 to 15 1/2 P/E multiple range.
Nope, apparently no over-valuation in the stock market -- and Brinker even thinks it's under-valued.
Conclusion: As of July, 2011, Brinker believes that the five primary causes of a bear market are still negative -- in other words, he is predicting that the current cyclical bull market will continue.
