" 'Pooh-pooh to the Whos!' he was grinch-ish-ly humming.
'They're finding out now that no Christmas is coming!
'They're just waking up! I know just what they'll do!
'Their mouths will hang open a minute or two
'Then all the Whos down in Who-ville will all cry BOO-HOO!'
'That's a noise,' grinned the Grinch,
'That I simply must hear!'
So he paused. And the Grinch put a hand to his ear.
And he did hear a sound rising over the snow.
It started in low. Then it started to grow...But the sound wasn't sad!
Why, this sound sounded merry!
It couldn't be so!
But it WAS merry! VERY!"*
How The Grinch Stole Christmas
New York: Random House, 1957.)
Are you feeling better than you did a month ago? My guess is you are feeling a heck of a lot better. We will not, and should not, ever forget Sept. 11, but time -- the great healer -- has been applying its balm. The recovery of the American spirit is yet another reason Osama (to whom Dr. Seuss' diagnosis of the Grinch applies "...that his heart was two sizes too small") and his co-murderers will fail in their attempt to defeat us.
It is easy to focus, as the media does, on lagging economic indicators like the employment statistics. While the pain experienced in the U.S. in terms of declining activity and employment is all too real, the historical fact is that equity markets begin to focus on the pending economic recovery sometime between halfway through a recession to approximately six months prior to its end. And on this score, one of the reasons I am willing to bet you feel better now is that much of the recent damage done to your equity portfolios has been erased by the very steady equity rally since Sept. 11.
The consensus view seems to be that the
interest-rate cuts and President Bush's tax cuts will do little to stimulate the economy because the heavily indebted consumer is choosing to save and to repair personal balance sheets rather than spend. But the recovery in U.S. investors' portfolios may be what saves Christmas.
It is certainly not hard to imagine a scenario in which the
steadily works it way higher through the end of the year. As we've noted before (
, 11/5/2001), the "fair value" of the S&P 500 based on expected earnings and current interest rates is around 1350 -- that's roughly where the index started this year. Wouldn't wiping out an entire year's worth of market losses engender a significant increase in consumer confidence? Wouldn't you be willing to perhaps buy one more holiday gift if your portfolio was restored? My guess is yes, based on the strong historical correlation between U.S. consumption and equity market advances. Having larger portfolios -- even if only on paper -- makes us feel wealthier and more willing to spend.
This link between consumption and equity returns is due to the fact that the top 40% of Americans in terms of income -- the group that has significant equity holdings -- account for more than 60% of total U.S. consumption. For this group, changes in the value of their equity holdings have far more impact on their net worth than tax rebates or declines in mortgage rates. So don't be surprised to read about stronger retail sales in the weeks ahead if current equity market trends continue.
If U.S. consumption rebounds quickly, undoubtedly Chairman
Greenspan's interest-rate cut last week will become controversial. Lowering interest rates below the rate of inflation is extraordinarily stimulative. But such criticism will be small-minded hindsight. With inflation likely to come down in light of a synchronized decline in global economic activity, the risks associated with the chairman's actions are quite small. Too, he can always quickly take back these cuts if the holiday shopping season is strong and the economy rebounds strongly.
In light of the current threats to global stability and economic prosperity, having to correct an overly powerful economic rebound will be a nice problem to have.
Hugh Whelan is an equity portfolio manager at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Whelan cannot provide investment advice or recommendations, he invites you to send comments on his column to