James Hallett

We are entering that time of year when some people turn to Santa Claus to find out who has been "naughty or nice." Santa also knows some people are studious, some are silly, some are sane and some are - well, some are different.

Whatever individual nature, when it comes to the financial markets there is a relationship between market volatility and human emotions. Emotionalism increases the possibility of confusion and misperception.

To avoid being lured into emotionally induced aberrant behavior, one must examine and understand the factual base of historical and statistical precedent. By understanding the past, we can better prepare for the present and the future.



Precedent - monetary infusion cycle

We are into the early phase of a massive monetary cycle created by the combined actions of the Federal Reserve and legislation. When President Barack Obama signed the American Recovery and Reinvestment Act (the Act) on Feb. 17, it added to the previous legislated stimulus and Fed actions.

Monetary infusion cycles are major macroeconomic events invariably bringing significant change to the economy and its inhabitants. Almost without exception, previous monetary infusion cycles resulted in significant price appreciation of productive assets, including many financial assets such as stock.

The bottom line is that the additional money supply created by this infusion has to go someplace. History clearly dictates that once created, this money supply cannot be withdrawn. The money supply can be used to fund increased productivity and innovations.

The increased money supply also will fund inflation. The important point is the price of productive assets increases. Precedent is clear that those who adopt to infusion cycle characteristics will benefit.



Santa's gifts to the insightful



So, how have the events of 2009 played out? One way to follow this cycle is via "inflection points."

The term inflection point refers to a specific time when "an event occurs that portends future events" (helps answer if the past is precedent). The first inflection point for 2009 was Feb. 17, the signing of the Act.

Point No. 2 occurred March 9, a date that will be famous in stock market history. Less than one month after the stimulus Act was signed, the stock market hit its bottom. On that March day, "the Dow" average closed at 6,547.

The precedent is this: The cyclical low of every previous infusion cycle never has been revisited. In other words, the stock market averages never have gone back to the levels of the previous infusion cycle lows. Never.



History ignored

This is very big-time historic stuff. Unfortunately, most financial media have ignored this historical/statistical precedent. There is too much focus on the sound bite of the moment. Why help people understand what insight history gives us when the media instead can create anxiety about today?

Since the low of the second inflection point on March 9, this cycle has produced a gain in the markets (Dow) of close to 50 percent. Those who understood history in this case, and those who recognized the historical precedent set in motion by this cycle, found themselves benefitting from some very nice financial gains.

Santa would be proud.



This column is for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.

James D. Hallett, Hallett & Associates, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or excluded from registration requirements.