Bull Market BelieversBy and
Veteran money manager Laszlo Birinyi will never forget the moment a year ago when the last ounce of confidence disappeared. New York University Professor Nouriel Roubini and many other prominent pundits were convinced the economy was in free fall, and that the consequences for the stock market would be dire. To the 66-year-old Birinyi, who oversees about $300 million, the widespread pessimism was a clear sign that stocks were headed higher: "At turning points," he says, "the mood is always in one direction."
Birinyi says the 69% gain for the Standard & Poor's 500-stock index since the Mar. 9 low last year is just the beginning of a bull market that may last through the next Presidential election. Two other prominent market players who were bullish last March, Barton Biggs of Traxis Partners and Leuthold Group founder Steve Leuthold, share his optimism, saying stocks will advance as the economy gains momentum and the fastest corporate earnings growth since 1994 persuades investors to shift into stocks from bonds. It is far from a unanimous sentiment, of course. Another widely respected investor who anticipated the rally, Jeremy Grantham, chief investment strategist for Grantham Mayo Van Otterloo, now believes the market is overvalued.
President Barack Obama made his own stock market prediction last year, saying on Mar. 3 that buying U.S. shares "is a potentially good deal" for long-term investors. Six days later, the S&P 500 hit a 12-year low of 676.53 and then began its epic climb. For Obama, gains in stock and credit markets may be the clearest evidence that his policies are working, after losses tied to subprime mortgages spurred a financial crisis that erased $11 trillion in stock market value and sent the unemployment rate above 10%.
While investors have reason to celebrate, they are still a long way from breaking even. As of Mar. 10, the S&P 500 is 27% below the high of 1,565.15 set on Oct. 9, 2007, and trades at the same level it was at back in April 2005. For investors to get into the black, stocks would have to regain more than $5 trillion in value.
Birinyi doesn't have a price target for the S&P 500, but he does say the rally may be a long one. The average bull market since the 1960s has lasted more than 1,000 trading days, data compiled by Bloomberg and Birinyi Associates show, while this one is just over 250 days old. And Birinyi expects this rally to be better than average because the deepest recessions give way to the strongest bull markets. "By any definition it is a bull market, and there's no stronger force in the market than momentum," he says. His data suggest this bull run will last until at least April 2013.
Biggs, whose flagship hedge fund returned three times the industry average last year, says stocks remain cheap relative to forecast earnings. The S&P 500 is valued at 14.7 times 2010 profits, assuming earnings for companies in the index rise 27%, the average estimate from analysts tracked by Bloomberg. That compares with an average multiple of 16.6 over the last 56 years. Wall Street firms predict total income at S&P 500 companies will rise 50% in the next two years, the biggest increase since 1994, according to estimates compiled by Bloomberg. "I'm very struck by the level of bearishness everywhere I go," says Biggs, who predicts the next move in the S&P 500 will be a 10% to 15% gain. "I'm not obsessed with history. I'm bullish because I think the global economic recovery is on track and is going to be surprisingly strong. The world was falling apart in 2009. There's been a tremendous change."
The fact that investors remain skittish is one of the key factors encouraging Leuthold, who told clients to stop putting money into the firm's bearish fund on Mar. 4, 2009. Investors have pumped $369 billion into mutual funds that hold bonds since March 2009, compared with $23.4 billion for stock funds, according to the Investment Company Institute, the Washington-based lobbying group for professional money managers. "Individual investors, as measured by mutual fund flows, have absolutely no current enthusiasm for equity investing," Leuthold wrote in a Mar. 5 report to clients. "As a contrarian, I view this environment of disbelief and skepticism as quite bullish."
That's because when skeptics regain confidence in stocks they will start pouring money into the market. And they have a lot of cash to play with. Investors fled to the shelter of money market funds as the financial crisis took hold in 2007 and 2008, and the $3.2 trillion that's in those accounts today means "there's still some money to be put to work," according to Mike Ryan, the head of wealth management research for the Americas at UBS Financial Services.
Of course, skeptics have plenty of reasons to keep their cash where it is. Unemployment remains high and the housing sector is still struggling—both factors that could keep a lid on consumer spending, which powers about 70% of the economy.
Jeremy Grantham is among those who see trouble ahead. Grantham, 71, whose firm manages $101 billion, says fair value for the S&P 500 is 875, or 24% below the Mar. 10 close. The figure is based on his calculation of historic price-earnings multiples, weighted to smooth out swings in profit margins. Grantham predicts that the deflating of the credit bubble will be a drag on the economy.
On Mar. 4 of last year, Grantham urged investors to move into stocks. What does he suggest today? "My recommendation to the typical investor would be to think outside the U.S.," Grantham says. "And when he thinks about the U.S., to be exclusively in defensive blue chips. The chances of a softening again—not a big collapse, but a secondary softening in the economy—are higher than the market believes."