Postcards From a Nowhere Market

By MICHAEL SANTOLI | MORE ARTICLES BY AUTHOR

A sampling of imaginary missives from the market's trips back and forth across the S&P 500's key level offers a narrative of what's changed and what hasn't.

We are, this week, a nation in commemoration mode, adhering to the customs of round-number anniversary remembrances. So let us recall and solemnize the 1200 level on the Standard & Poor's 500 Index.

This particular index value, briefly crossed again last week, is perhaps the most-traversed trench in the bull-versus-bear battles in all of market history. The 1200 line has been breached in one direction or the other during 42 weeks since it was first attained near the very end of 1998. Put another way, in the nearly 13 years since then, the index has crossed 1200 in 6% of all weeks. And it sits roughly in the middle of the range the index has inhabited for some 14 years, with the exception of the brief panic collapse in late 2008 and early 2009.

As with any oft-visited venue, a sampling of imaginary postcards from memorable trips offers a neat narrative of what has changed and what hasn't.

"Dec. 28, 1998: That financial crisis sure didn't last long, and the recovery barely gave most of us time to get back into the market. Sure, Asian governments were on the ropes, and Long-Term Capital Management almost sank all of Wall Street, but easy money absolves most sins.

"It seemed David Berry of Keefe Bruyette & Woods had it right in August, when the Wall Street Journal quoted him saying, 'Everyone in the world wants their money back. It's like there's been a global margin call.' Yet, nearly everyone came up with the collateral, thanks to the Federal Reserve. This Greenspan guy -- it's inconceivable that he might ever fail us, right? Sure, the market isn't cheap, trading well above 20 times forecast earnings. But this economy is so strong that Clinton's party won big in the midterm elections, despite the scandal. It wouldn't be surprising if this tech-IPO wave went parabolic in the New Year."

Then, less than three years later, the mail brings a more sober dispatch. "Aug. 6, 2001: Well, 1200 looks a bit different on this pass. Perhaps we should have anticipated that the surge above 1500 in early 2000 left a bit too much air underneath stocks, with so much New Age rationalization of 'permanently higher-stock valuations' making the rounds. But, with the market's 20% drop from the highs, have we not pretty much priced in the deflation of the tech bubble and a likely recession? Sure, stocks still aren't cheap, well above 20 times forecast profits, but rates are low, and maybe these are trough earnings."

A month later, the 9/11 attacks intervened (sadly counting the aforementioned David Berry among the victims at the World Trade Center). Stocks plunged, then rebounded hard, and then resumed their bear market, never to see 1200 again until late 2004. Equities chopped around in a numbing trading range well into 2005, until running toward a return to the all-time highs above 1500 in 2007.

And then: "Sept. 15, 2008: We've seen 1200 before, but the rest of what is going on is profoundly new and unnerving. Did they 'let' Lehman fail, or like the old line from the grizzled football coach, did they lose just because they ran out of game time? We're already down more than 20%, making this a bear market, so how much more do stocks need to suffer to reflect all this uncertainty?"

A lot, it turned out.

Most recently last week, the index again passed above and then back through 1200 Thursday, finishing the week at 1154.

"Sept. 8, 2011: This time, it appears, the 'policy error' is occurring in Europe, with monetary and political leaders' halting efforts to support the system. Greek bonds are pricing in a near-certain default of some description.

"Stocks are cheaper now than at any previous visit to 1200 based on expected earnings. But valuation is a lousy tactical tool, especially with credit conditions worsening so rapidly. If there's any solace, it is that this market indigestion began with the index nowhere near an all-time high. We'll see if that serves as a buffer as earnings forecasts for 2012 keep sliding.

"It's never a good thing when investors view central-bank action as the main reason for hope (over experience), because usually the data and the markets inflict more pain than investors imagined once they began looking for a rescue. This Bernanke guy, he's been Johnny on the spot during this entire compound-crisis period. Is it even conceivable that he will ever fail us?"