SmartMoney.com
Has a New Bull Market Begun?
Monday June 2, 2:45 pm ET
By Stacey L. Bradford
JUST AS SOME of our pundits predicted, the stock market has run up handsomely since the end of March. We can thank a quick conflict in Iraq, lower oil prices and a weakening dollar for the boost in investor confidence and the rise in equities.
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The question on many individual investors' minds now is whether it's finally safe for the average Joe to start buying stocks again. Was the spring bounce merely another bear-market head fake, or does this rally have legs?
According to most of our gurus, the rally isn't over yet. While it may be a bit unrealistic to think that the Standard & Poor's 500 can jump another 20% in two months, stock watchers like Salomon Smith Barney's Tobias Levkovich and Goldman Sachs's Abby Joseph Cohen argue that equities will continue to move ahead and should outperform bonds over the next 12 months.
We know: You've heard this all before. But for the first time in years, there seems to be legitimate cause for optimism. First, earnings are finally starting to improve. During the first quarter, corporate profits increased 11.7%. And despite a weak U.S. economy, UBS Warburg's Ed Kerschner writes, earnings will continue to stabilize and finally rise on a sustained basis this year, after plunging in 2001 and sputtering in 2002. His forecast calls for earnings to step up 6.3% in 2003, including a 9% year-over-year rise in the fourth quarter.
Moreover, ISI Group's Ed Hyman writes that he can't recall another time when there was so much economic stimulus in the pipeline. On the monetary front, he points out that the rally in bonds has kept long-term yields low and boosted liquidity. The Bank of Japan is still easing rates, and odds are high that the European Central Bank will follow suit. On the fiscal front, there's the new U.S. tax-cut package and extended unemployment benefits. Who needs another rate cut in an environment like this?
There's even some historical precedence for stocks to move higher. Sharp reversals like the one we've seen since the market bounced off its March lows have occurred only 15 or 16 times since 1945, writes Banc of America Securities' Thomas McManus. When they took place, the rallies averaged a gain of 25% over 11 months.
If you're still feeling a bit unsure about the market — and who could blame you — consider your alternatives in this zero-inflation/mild-deflation environment. Even if prices were deflating at 2% a year — a disaster scenario — stuffing your extra cash in your mattress would yield you additional buying power of just 2% annually. That won't help anyone retire early. Moreover, you've already missed the big run-up in bonds. Everyone from Levkovich to Merrill Lynch's Richard Bernstein says bonds are overvalued. The 10-year U.S. Treasury note is now trading at about an 80% premium to its long-term historical price/yield, argues Levkovich.
Heck, even Pimco's Bill Gross writes that he's feeling cautious about bonds after their recent run — particularly emerging-market and high-yield, or junk, bonds. The time to get in was 12 months ago, he argues. Nowadays, junk bonds are simply too richly priced relative to their high level of risk. The sexiest fixed-income alternative Gross can come up with is buying munis and clipping the 6% coupon. (He recommends individual investors buy municipal closed-end bond funds.) Coming from a bond hawk, that's saying something.
Against this backdrop, it seems stocks might actually be an investor's best bet right now, difficult as that may be to believe.
So which ones should you buy? As we've pointed out many times in past Pundit Watch columns, buying into the S&P 500 index probably isn't the best way to navigate this up-and-down market. Instead, Merrill Lynch's Bernstein recommends investors concentrate on higher-quality equities, which appear cheap compared with riskier names. And if you can find a strong company that also pays a dividend, at least you can count on the income should the market suffer another setback.
To hear it straight from the horses' mouths, look at the pundit predictions below. |
