For stock market punters, Hoey states that "we have a substantial bull market in the stock market" and that this is occurring "in a sustainable economic expansion." He points out that in the last long term bull market that began in the 1980's, we had a double dip recession because Fed Chairman Paul Volker ratcheted up interest rates to 21% to stop inflation, something Ben Bernanke is not currently doing.

I would add that the inflation of the 1970's was likely caused by the Fed's excessive money creation, which many observers agree is happening again under Bernanke. Yes, Fed policies in the early 1980's and 2009 are different, but the Fed's current policy of effectively debasing the dollar to "ensure" recovery may lead to much higher prices and interest rates in future years. At that point in the future, Fed policy may need to be tightened, which could result in another stock market downturn and another recession.

It appears that the stock market retrenchment we witnessed from September 2008 to March 2009 is similar in severity to the 48% stock bear market seen in 1973-74. I am convinced that if Bernanke did not and was not continuing to pour money into the financial system, the damage today to the stock market would have been much worse than 1974. However, this Fed policy, including sustaining Japanese style "zombie banks" and companies, may be merely postponing our ability to recover in a dynamic way economically by many years.

We may have seen the stock market low for the bear market in March 2009 at Dow 6469.95. This assumes, though, that Bernanke can succeed in getting the economy going without excess inflation and the Obama administration can rein in spending (something that the administration did not appear to be concerned with until the recent blue dog Democratic challenge to the Obama healthcare plan). These are challenges for the stock market, though technically it appears to have room to continue upward.

We will have to observe Bernanke's future exit strategy to get us out of the mess that we are in to determine the longer term direction of the stock market and the power of future inflationary forces.

In my December 8th 2008 article, "Why Long Term Investing is Not Dead" (see related posts below), I noted that one could consider holding stocks as portion of one's portfolio even during a bear market. I further outlined some of my positions at that time and made the case that asset diversification can help mitigate the effects of a severe downturn in stocks.

However life-altering the stock market Crash of 2008-09 has been, it does have precedent in financial history. The American stock market and economy have always recovered in the past, though poor policy choices on the part of our leaders can extend the time for that recovery considerably.

Related posts:

Will This Stock Market Go Lower?

posted March 17, 2009

Would You Rather Be a Trader or an Investor?

posted February 23, 2009

Why Long Term Investing in the Stock Market is not Dead

posted December 8, 2008

Stock Market Investing and the Power of Contrary Opinion

posted March 22, 2007

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