This Bull Market Gets No Respect?
The current bull market on Wall Street has one thing in common with late comedian Rodney Dangerfield: It don't get no respect!As long as I can remember, I've been telling people this market will climb the wall of worry and surprise people to the upside. And yet, the amount of skepticism and distrust of stocks remains at record levels.
Numbers don't lie. The Standard and Poor's 500, an index of large-company U.S. stocks, eked out a fresh five-year high Thursday at 1480.94. It is up 119% since the bull market began on March 9, 2009, which means it is a member of the so-called "100% Gain Club," and just one of nine bull markets in the benchmark index's history to post a triple-digit gain, according to Bespoke Investment Group.
The current bull, which followed the worst bear market, or market plunge, since the Great Depression, is also 1,407 days old, which ranks eighth and also puts it in the "1,000 Day Club."
In cash terms, the stock market has generated $10.5 trillion in paper wealth since the bear market ended, according to Wilshire Associates.
So why is this historically significant market advance, which has enabled the S&P 500 to climb within 6% of its Oct. 9, 2007, all-time high of 1565.15, so despised? So disrespected? So distrusted?
"It is the Rodney Dangerfield of bull markets," says Gene Needles, CEO of American Beacon Funds. He says most investors don't know how strong the market is because they have focused on short-term volatility. "They think the market is down. They've been reading all of the dire headlines. The financial crisis. Fiscal cliff. Debt-ceiling debate. Europe. Pick your poison. It hasn't felt like a bull market. It's not like in the 1990s when there was a ticker-tape-parade-type atmosphere every day on Wall Street."
The stellar statistics, of course, tell a story of success, not failure. But, oddly, investors, especially ones on Main Street, don't seem to care. For much of the last 44 months, most investors, many of them psychologically and financially scarred by the 2008-09 financial crisis, have sworn off the stock market.
Instead, in search of perceived safety and a good night's sleep, they have plowed the bulk of their life savings into bonds or deposited their cash in banks that pay about the same zero interest rate as the mattress-turned-piggy-bank that gained acclaim after the 1929 stock market crash.
In the five years ended in 2012, individual investors have yanked an estimated $557 billion out of U.S. stock mutual funds, while $1 trillion has been funneled into bond funds, according to data from the Investment Company Institute, a fund company trade group.
It's as if investors can't forgive the market for burning them badly in the rout a few years ago; a plunge that was less than a decade removed from the tech-stock-inspired crash in 2000. Like a spurned lover, investors have been unwilling to give the stock market a second chance, or even a third chance.
"Investors don't really trust the market itself, so they don't trust the rally," says Paul Hickey, co-founder of Bespoke Investment Group.
Despite the lingering pessimistic sentiment, the fact that the stock market keeps rising ever closer to its old all-time high in the face of bad news is a positive sign, counters Needles.
"It's more of a sign of a market breakout than a top," Needles says. "Investors have a renewed appetite for risk."
There are other theories as to why stocks have lost their luster as the go-to investment to get rich, save for college and fund a retirement nest egg.
Andres Garcia-Amaya, a global markets strategist at JPMorgan Funds who happens to think the current stock market rally has a ways to go, blames investor complacency. The bond market has been in a bull market for three decades, and investors scared off by the volatility of stocks, he says, found comfort in the solid and competitive performance of bonds vs. stocks over the years, especially the big outperformance during and after the 2008 financial crisis.
Another big factor causing investors' aversion to stocks to grow in recent years is that they have been unable to shake the bad memories of past stock market plunges, says Doug Sandler, chief equity officer at RiverFront Investment Group.
"We have been conditioned over the past 12 years into thinking that buying stocks is a bad decision, because they always get beat up at some point," Sandler says.
Adds Bespoke's Hickey: "With two 50% haircuts in the last 12 years, investors think it is just a matter of time before we get the next 50% drop. So they have just given up."
The other thing that has given investors pause, Sandler adds, is the fact that the market rally since 2009 has been driven in large part by policies and actions of lawmakers in Congress and central bankers, such as the Federal Reserve and European Central Bank. Some Wall Street bears argue that the gains have been artificially inflated by the stimulus injected into markets by bankers. These drastic and unprecedented measures used by central bankers to reignite the economy, revive risk taking and boost investor confidence are akin to "steroids" or "sugar high," critics say.
What's more, having politicians and bankers determine the fate of markets makes it hard to handicap the future.
"That stuff is really hard to forecast," says Sandler. "I can't tell you what (ECB head) Mario Draghi is thinking right now. We can guess. But it is different than trying to figure out how Apple's iPhone is selling. And that scares people."
But that doesn't mean that there is not a case to be made for stocks.
Ironically, while the irrational exuberance of the go-go 1990s, or even the heady days of the real estate boom in the mid-2000s, is long gone, the market, at least by common measures used by Wall Street to measure its vital signs, is in far better shape today and it points to more gains ahead, Sandler argues. Back in late 1999 and early 2000, when tech stocks were king and nearing a pre-crash peak, the S&P 500 was trading at more than 30 times its estimated earnings.
Today the market is trading at just 13 times estimated profits for 2013, which is below the long-term average of 15 times earnings. The market's current price-to-earnings multiple is even lower than it was at the stock market's last peak in October 2007, Sandler says. Corporate earnings, which slowed sharply in the second half of 2012, are expected to re-accelerate and grow roughly 10.6% this year, according to current analyst estimates tracked by Thomson Reuters.
So the stock market is not wildly overvalued and screaming that a top is near.
"Are we bumping up against super-high valuations? The answer is no," says Sandler, adding that the market is reasonably priced.
Not only are stocks not overvalued, they also look attractive relative to bonds, which currently are trading at, or near, record-high prices and sporting historically low yields that make it tough for investors to grow their money and build enough wealth to meet their long-term goals, says Garcia-Amaya. The yield on the benchmark 10-year Treasury bond is 1.83%. In contrast, stocks in the S&P 500 that pay dividends have an average yield of 2.8%, says S&P Dow Jones Indices.
"Relative to fixed-income, stocks look favorable," says Garcia-Amaya.
The broader economy is also performing better, albeit at a sub-par pace. The real estate recovery is also gaining speed and appears to be on a sustainable path. And, despite a still-high unemployment rate of 7.8%, the job market seems to be firming up. All of these developments are supportive of stocks. Low bond yields and tepid inflation also bode well for stocks.
Of course, there is still no shortage of things for jittery investors to worry about. While the nation narrowly missed falling off the fiscal cliff at the start of 2013, investors are now confronted with another contentious fight in Washington over raising the debt ceiling and ways to cut the deficit. The World Bank warned Tuesday that the U.S. budget battle is already restraining economic growth around the world and warned the U.S. could fall back into recession if massive budget cuts aren't avoided in coming months.
In short, fiscal risks still abound. Moody's, a ratings agency that evaluates the financial health of sovereign nations, including the U.S., warned this week that it will downgrade the nation's triple-A credit rating if Congress doesn't raise the debt ceiling and defaults on its debts. A similar move by S&P in the summer of 2011 after a similar battle resulted in the Dow tumbling 635 points in a single day.
Still, there are signs that individual investors' distaste for stocks might be waning, as the market nears its old peak and bonds start to show signs of weakness.
In its latest reading on fund flows, Lipper reported last Thursday that stock funds, including mutual funds and exchange traded funds that invest in both U.S. and foreign shares, took in a whopping $18.3 billion in the week ended Jan. 9, the fourth-largest weekly inflow since it began tracking them in January 1992. American Beacon Funds have been the recipient of some of those big recent inflows, Needles says. "Investors," he says, "are finally coming to the realization that the conservative investments they have been in have returned little to nothing over the past several months and years. That has left them in a deep hole."
While some pundits warn that Main Street investors returning to stocks in year four of the bull is a sign of a market top, many other Wall Street pros say it is a bullish signal, as it shows that there is fresh money coming in from the sidelines. It also suggests that investor confidence is rising and they are willing to take more risk. If there ever was a big catalyst for the stock market, it would be individual investors returning to stocks and shifting the mountain of cash now on the sidelines or parked in bond funds and back into risk assets. If the long-awaited asset shift from bonds to stocks occurs, the move is likely in its early innings.
"Net net, it's certainly a bullish backdrop for the market," says Bespoke's Hickey. "With low levels of investor participation now, there is a lot of convincing left for the bull to do."
Scars of 2008 are still fresh for most retail investors who got burned during the last crisis. Many believe this market is "rigged" and in a sense, they're right. Most retail investors don't stand a chance which is why America's 401 (k) nightmare keeps getting worse despite rising stock market.
Even hedge funds are finding these markets tough, which is why most are succumbing to hedge fund Darwinism. And yet, when I look at these markets, I always find opportunities. For example, while many investors are shocked to see Research in Motion (RIM) up over 150% since September while Apple shares dropped below $500, I won't be shocked to find out many top funds barreled into RIM and dumped Apple in Q4 2012 when 13F figures become publicly available (this could change in Q1 so be careful!!!).
Yup, this bull market gets no respect. People worried about another RIM job, but top traders are having fun playing "big announcements," buying shares before and dumping them once the news comes out. That's why there are a lot of nervous people out there because by the time they realize what's going on, the big money will be made. Retail and institutional investors don't stand a chance trading these markets.
Having said this, if you pick good companies and stick with them, you'll realize that market timing is a loser's proposition. Let the top hedge funds trade away, most hedge funds are still underperforming the broader market. They too have been fearing the "end of the world," worried about another global meltdown. Few realize that the biggest risk is a post fiscal cliff melt-up.
When it comes to reading markets, I prefer to look at where top funds and long-term investors like pension funds are putting their money at work. Yesterday, I wrote about Canadian pension funds betting on global trade. These are private market deals but it still conveys a lot in terms of where they think opportunities lie ahead. Sure, pensions are long-term investors, and have a much longer investment horizon than mutual funds or hedge funds, but that works in their favor in these markets.
Are there risks ahead? Of course there are. This market will be tested again and again but as long as it keeps climbing the wall of worry, lots of nervous portfolio managers underperforming will give up and chase stocks at much higher levels. Meanwhile, top traders will continue raking it in.
Below, Lamoureux and Co. President, Yves Lamoureux, tells Fox Business that stocks will double after a mild pullback in 2013. Not sure about a mild pullback or a "doubling of stocks" (think individual shares/ sectors will double and even triple), but anything can happen during the upcoming debt ceiling talks. Along with Yves, I'm long Chinese shares but prefer playing that theme via coal, copper and steel shares (keeping an eye on shipping shares too).
Also embedded a hilarious classic stand up routine of the late Rodney Dangerfield from his special "I Can't Take it No More." Tell you, if this market keeps grinding higher -- or worse, melts up -- lots of money managers will be singing the same tune. That's what happens when the bull market gets no respect.