Posted by: Ben Levisohn on February 13, 2009
Despite some attention getting jumps and slumps – like a 300 point drop following Treasury Secretary Geithner’s disclosure of the bank rescue plan on Feb. 10 — the stock market has essentially done nothing for the last two months. Since rallying from its lows on November 20, the Dow Jones has traded in a 1000 point range, while the S&P 500 has bounced between 800 and 925.
For the bulls out there, this is good news. They look at the constant stream of negative headlines – falling bank stocks, rising unemployment, cratering home prices – and see a market that could have, perhaps should have, fallen much, much further. “Citigroup traded $12 back in November when the market hit 7500,” says Robert Auer, manager of the Auer Growth Fund. “We’ve been able to cut bank shares in half again and the market isn’t any lower. It’s absorbed all the bad news.”
So what’s it going to take to get the market moving again? Auer sees a lot of “dry powder” sitting on the sideline, $3 trillion worth, actually. In normal times, a little over $1 trillion sits in money market funds. Now it’s around $4 trillion. That money is earning next to nothing, and as soon as the market starts to recover, it could flood back into stocks, Auer says.
Nor does it take a magician – or a Madoff – to turn $3 trillion into $10 trillion. On the way down, more market cap is lost than the actual dollar amount traded. For instance, on Feb. 13, JPMorgan Chase dropped nearly 6%, to close at $24.69 on light volume of 58.19 million shares. That means it took only $1.4 billion of investor money to shed $5.6 billion in market capitalization, a drop of $4 dollars for every one dollar traded.
But the same math works on the upside as well. That $3 trillion sitting in money market accounts, if invested in the stock market, could turn into $10 trillion in market gains. When that happens is anyone’s guess – Auer doesn’t have a time frame. But he is more than a little optimistic that the worst is over. “This was the worst ten years ever [for the stock market], even worse than the depression,” Auer says. “Now, we could be going into a glory decade.”
That’s a notion that shell-shocked investors may not share at the moment, but market rallies sometimes happen when you least expect them.