The Birth of a New Bull Market
After my articles the last few weeks, many out there probably think of me as pretty bearish on stocks. However, friends, I'd like to clarify that point. In the short term, it is still my view that the market has some tough times ahead. However, taking a longer term perspective, I don't think it's possible to be more bullish. In fact, in our humble opinion, we are about the witness the birth of a bull market from the ashes of a bear!
To clarify further, I am not saying that the tough times are over and investors need to rush out and buy stocks. While the market has corrected, as anticipated, we are not of the belief that the correction is over, or that the market is now fairly priced. We do, however, have a very different opinion on where the stock market is currently in its life cycle.
Many today argue that after the market's peak in 2007 and subsequent decline, investors have another eight to twelve years of bear market to look forward to before the correction is over. Our view is substantially more optimistic.
Looking at stocks over the past fifteen years, one will notice that neither the Dow Jones Industrial, nor the S&P 500 (a much better sample) have gone anywhere in more than a decade, since 1998. In fact, an investor who bought either of these indices at that time would actually have losses - significant losses - in real terms (when inflation is considered).
This brings us to the startling realization that stocks have not been in a bear market since 2007, as many would believe, but since 1998. In other words, we are likely much, much closer to the end of this bear market than most believe.
Though we frequently cite his administration for political comparison, the current state of financial markets is not unlike the 1970s under Jimmy Carter. The market actually made a peak in 1966 under Nixon, and despite making a marginal high under Ford around '73, the market didn't really go anywhere until 1982, right after Carter left office.
What this amounted to was essentially a lost decade for stocks, much like the one we have just emerged from. In 2000 the stocks set new highs, after which the market basically trended sideways until setting a new all-time high, though marginally, in 2007.
Our contention is that, thanks in part to changes in technology that permit information to be disseminated more quickly, the market has accomplished in ten years what previously took fourteen: The market has undergone a prolonged and substantial correction in stock prices, in real terms, and is now poised to resume the trend of a long-term bull.
For our outlook we look once again to the past: After the bull market closed with the Carter years, Reagan took office and oversaw drastic policy changes that ushered in a new era of prosperity for companies and escalating stock prices that last for approximately twenty years.
The same shift is, in our opinion, developing in the market, and will likely take place at the end of Obama's first (and probably only) term. Lately the economy has begun showing signs of life, from housing inventory dropping to manufacturing beginning to shift to the US, to the financial crisis abating.
Please don't misunderstand, investors can't simply throw caution to the wind and begin buying indiscriminately. There is still a possibility that we are in store for a slight double dip, although more so in stock prices - it has already started - than in the economy. However, this is mostly because the economy has shown improvement, but not nearly enough to justify the stock market's recent high prices.
Nevertheless, we maintain that this correction is likely the start of a shake-out that will cause many investors to shift to traditionally "safer" investments (Treasury bonds and the like). These investors will certainly grow to regret their impatience, as we've written before. With bond yields at long-term lows, bondholders are going to take major losses when interest rates start creeping back up. Getting back on point, once the shake-out in equities draws to a close, which will happen much sooner than most probably think, look out for the bull coming through!