Earlier this year, the bears noted that the Dow Jones industrial average might be following the 1928-1930 Great Crash script. Fortunately, it hasn't played out that way so far. Now the bears are focusing on 1938-1939, when Hitler invaded Austria, Czechoslovakia and Poland.
The concern is that current geopolitical developments are eerily reminiscent of that period. I noted a week ago that in October 1938, Hitler marched unopposed into Sudetenland a month after Britain and France gave him this territory that was part of Czechoslovakia. The Sudeten Nazi Party had set the stage for this annexation by instigating strikes and riots, which were shown in German newsreels as evidence of Czech atrocities against German-speaking Sudetens. Hitler threatened war unless he was appeased, which he was at the infamous meeting in Munich. Putin seems to be following the same script in the Ukraine.
Nevertheless, the S&P 500 rose to a new intraday record high of 1,883 on Friday before closing at 1,866. It managed to gain 1.4% for the week, following the previous week's 2% decline. That's despite last Wednesday's 0.6% decline in response to Fed Chairwoman Janet Yellen's off-the-cuff statement that the Fed might start raising interest rates six months after QE is terminated probably by the end of the year. That would mean that rates will start rising around mid-2015.
Stocks rebounded 0.6% the next day, Thursday, as investors realized that Ms. Yellen's forward guidance depends on inflation rising back to 2% and the unemployment rate falling probably closer to 5.5%. That might take longer to happen than mid-2015. In any event, the Fed's latest “dot plot” showed that in the latest economic projections of the FOMC's participants, the federal funds rate is expected to be just 1% at the end of 2015, hardly an impediment to higher stock prices.
So far, the stock market is continuing to follow a bull market script similar to the bull markets that started in 1982 and in 1990. That's mostly because forward earnings for the S&P 500/400/600 continue to rise to record highs.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.
