10 reasons to be bullish
By Marshall Loeb, CBS.MarketWatch.com
SAN FRANCISCO (CBS.MW) -- Just about every investor is wondering when the stock market will touch bottom, but here is one professional who thinks she may know the answer down to the precise day.
The good news -- if she is right -- is that the worst is already behind us. Indeed, she figures that the market hit its bottom on Tuesday, July 23rd, when both the Dow Jones Industrials and the Standard & Poor's 500 Index plunged below their September 21 lows. Since then the Dow has come back 15 percent and the S&P 18 percent. (The Nasdaq, which reached its recent low on August 5, has since climbed 14 percent.)
"July 23 could turn out to be a very important day." So says Dr. Lynn Reaser, chief economist and senior market strategist of Banc of America Capital Management, which manages some $300 billion in assets for institutions and individuals.
Reaser backs up her conclusion with 10 reasons why the market should rise:
1- Interest rates obviously have come down dramatically, and that creates a much better outlook for stocks than before.
2- Beyond interest rates, the Federal Reserve is pursuing a very accommodative monetary policy. The nation's money supply, the so-called M2, in the past year has been growing at a fast annual rate of 8 percent, Reaser notes. This should make it relatively easy for business people to borrow money to create, build, expand and hire.
3- Using any economic model that factors in the outlook for profits, the current level of interest rates and the trend toward rising productivity in the U.S. leads to the conclusion that the stock market is not overvalued, but is generally undervalued.
4- Spurred by record low mortgage rates, large numbers of homeowners continue to refinance their houses. This reduces the amount of mortgage interest they have to pay every month and gives them more money to spend, bolstering the economy and the market.
5- There has been a decline lately in negative news. Reaser notes that there have been no massive new revelations of corporate fraud or huge accounting scandals.
6- Thanks to remarkably low inflation, wages are rising faster than prices. This gives consumers more incentive -- and wherewithal -- to continue buying at a strong rate.
7- The decline in the value of the dollar has helped many U.S. companies increase their export sales abroad.
8- The job market is at least stabilizing, and the worst of the layoffs are behind us. (But the unemployment rate is a lagging indicator, and it will be a while before the current 5.9 percent rate starts to decline.)
9- In the stock market, both the Dow and the S&P have shown a gain for five weeks straight now, despite Friday's decline. And many companies have announced buy-back programs for their own stock, including Genentech (DNA: news, chart, profile), Procter & Gamble (PG: news, chart, profile), Kellogg (K: news, chart, profile), and Bank One (ONE: news, chart, profile), among others. This additional demand should help buoy the stock and serve as a sign that the company's top management believes its shares are a sound investment.
10- "Profits," Reaser says, "have already turned the corner and should continue to advance in the coming year, following last year's deep declines. Although few companies will be able to raise prices significantly, productivity gains will help profit margins while a stronger economy will gradually help sales volumes."
Given all this, Reaser believes the market should have a fairly sharp upturn, showing perhaps a double-digit gain between now and Christmas. But for the longer term, say five to 10 years, she expects annual gains to average 7 to 8 percent, in line with her anticipated increases in corporate profits.
In this environment, she thinks it reasonable for people who are not quite yet ready for retirement to allocate about 60 percent of their portfolio to stocks, with an emphasis on quality.
Among those that Lynn Reaser recommends are 3M (MMM: news, chart, profile) and General Electric (GE: news, chart, profile) in basic industries; Anheuser-Busch (BUD: news, chart, profile) and PepsiCo (PEP: news, chart, profile) in consumer goods; Eli Lilly (LLY: news, chart, profile) and Pfizer (PFE: news, chart, profile) in health care, Home Depot (HD: news, chart, profile) and Wal-Mart (WMT: news, chart, profile) in retailing, and Cisco Systems(CSCO: news, chart, profile), Dell (DELL: news, chart, profile) and Microsoft (MSFT: news, chart, profile) in technology.
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