How long can stocks’ rally go on?
One year ago this week, as the devastated stock market finally began to turn up from its lowest level in a decade, there was widespread doubt that any rally could last.
For many investors, that apprehension hasn’t gone away -- even though U.S. share prices over the last 12 months have posted their biggest gains since the 1930s.
With fears of a renewed economic slide still running high, “It’s a difficult bull market to love,” said James Stack, veteran editor of the InvesTech market newsletter in Whitefish, Mont.
Today marks the one-year anniversary of the end of the last bear market. After diving as the global financial system and the economy reeled in late 2008 and early 2009, the Dow Jones industrial average bottomed at a 12-year low of 6,547 on March 9, 2009, down 54% from its all-time high of 14,164 reached in October 2007.
Since then, as the threat of a second Great Depression has receded and much of the world economy has begun to grow again, stock markets around the globe have staged powerful rallies.
The Dow, which edged down 13.68 points, or 0.1%, to 10,552.52 on Monday, is up 61% from its March 2009 low.
Broader indexes have posted even bigger gains. The Standard & Poor’s 500 is up 68% over the last year. That is the strongest advance for any first year of a new bull market since the mid-1930s, according to S&P. The Russell 2,000 small-stock index has soared 94%.
But given that stocks’ losses in 2008 and 2009 were the worst since the ‘30s, a huge snap-back made sense as investors realized that economic Armageddon had been avoided, or at least postponed, analysts say.
“We’ve had the survival rally,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Va.
The important debate now, of course, is whether the surge in share prices is a reason to bet on more to come -- or justification for staying away.
The history of bull markets is that they rarely die after just one year, according to research by Bespoke Investment Group.
Measuring back to 1927, Bespoke counted 13 bull markets in the S&P 500 that made it past the one-year point. Eleven of those bull markets went on for at least another year, and the average life span was 4.4 years.
The average gain of S&P bull markets lasting at least one year: 153%.
But Wall Street historians remain mindful of the market’s gyrations in the 1930s, when stocks repeated a pattern of violent declines and wild rallies, reflecting the massive economic uncertainty of the Depression years.
So far, many individual investors continue to cast a vote of no-confidence in U.S. stocks, favoring the perceived safety of bonds instead.
Last year the public poured record sums into bond mutual funds. That trend has persisted in 2010: In the first eight weeks of this year net cash inflows to bond funds have totaled $56.5 billion, while domestic stock funds have suffered a net outflow of $4.6 billion.
RidgeWorth’s Gayle said investors had been unable to shake the trauma of the one-two punch of the last decade: The 2008-09 plunge was bad enough, he noted, but it followed the technology stock crash of 2000-02, when the collapse of the dot-com sector obliterated millions of portfolios.
In a sobering reminder of that debacle, Wednesday marks the 10-year anniversary of the all-time high reached by the tech-dominated Nasdaq composite index. The Nasdaq closed at 5,048.62 on March 10, 2000 -- and then entered a grinding bear market that wiped out 78% of its value by October 2002.
“Guys who have been saving in their 401(k) for the past 10 years have really gotten their heads handed to them” by the stock market, Gayle said. “Anybody who invested in tech stocks during the tech bubble is still trying to get above water.”
The Nasdaq index, at 2,332.21 on Monday, was up 84% from a year earlier, but still down 54% since 2000.
Stock bulls say the mistake investors are making is spending too much time looking backward.
A year ago share prices correctly began to forecast that the economy would recover, optimists say. They believe that’s still the market’s message.
“We are early in this economic recovery and therefore also in the stock market recovery,” said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.
InvesTech’s Stack also counts himself in the bullish camp, noting the sharp rebound in earnings of many U.S. blue-chip companies over the last few quarters. Although much of that profit recovery has stemmed from cost-cutting, Stack believes that it has set the scene for more to come if companies’ sales improve even modestly in the U.S. and abroad.
“Any surprises in earnings in the next six to nine months are going to be to the upside,” Stack said. “Stock prices lead earnings, and people fail to appreciate how far ahead they can lead.”
But in the face of legitimate fears that the economy could stumble again -- or at least slow -- as the federal government and the Federal Reserve wind down their unprecedented economic aid programs, many market pros say investors who are putting new money into stocks should favor big-name, financially strong companies.
“We’re not ready to say the bull market is over,” said Ed Clissold, senior analyst at market research firm Ned Davis Research in Atlanta. But he said the firm was advising clients to shift from smaller stocks to blue-chip issues while also retaining a bet on emerging-market stocks overseas.
So far this year, however, smaller stocks are continuing to lead blue chips. The Russell 2,000 index is up 6.7% since Dec. 31, compared with a 2.1% gain for the S&P 500.
Bill King, chief market strategist at M. Ramsey King Securities in Burr Ridge, Ill., said he was telling clients to hold off on making new investments because he fears stocks finally are primed for a significant pullback -- the “correction” of 10% or more that has failed to occur for the last year.
“It’s too late to buy right now because it’s too dangerous,” King said. “We’ve had this enormous rally.”
Gayle, however, says investors who continue to sit out will become more frustrated if this bull market, like most, has much longer than just one year to run.
“If you are out of the market you should be averaging back in,” he said. “The market will be vulnerable this year, but waiting on the sidelines while the economy is growing is a risky proposition.”
walter.hamilton
@latimes.com
