A Year Later: Investors Hope Not to Get Gored By Bull
After a wild ride to historic highs then a violent crash and a narrow escape from a Depression, Wall Street might finally be in for a quiet ride in the country.
The stock market on Tuesday noted the one-year anniversary of the new bull market with far different conditions: Stocks have rallied more than 60 percent, the economy is at least off the floor and investors continue to get more comfortable after getting crushed the previous year.
Prevailing sentiment for the occasion was optimism that the biggest gyrations are over and the road ahead will be, if not without pitfalls and potholes, at least a more predictable journey.
"It was a once-in-75-year occurrence and hopefully everybody learned from it," says Uri Landesman, head of global growth strategies at ING Investment Management in New York. "After a wild decade of volatility left us with a flat S&P, I'd like to think we're entering the next decade where low double-digit gains are going to be the average and the volatility around them at least on a year-to-year basis has been reduced."
The Standard & Poor's 500 is up 68.3 percent in the past year, while the Dow is up 61.2 percent and the Nasdaq tech barometer has soared 83.8 percent. By a basic definition it has been a bull rally of historic proportions.
But in this case, the bull is in the eye of the beholder.
The major averages are still off a full 25 percent from their all-time highs of October 2007 and investors would probably be unwise to expect another 2009-size rally to restore portfolios to their former values.
"I don't think it will be so quick for us to be back where we were before," says Emily Sanders, CEO of Sanders Financial Management in Atlanta. "There's many, many more bank failures to come and Main Street is going to be suffering for years. Clearly Wall Street has recovered, but as far as consumer spending and Main Street, we're still very skeptical about that part of the recovery."
How rapid the pace of recovery—not the recovery itself—seems to be the biggest sticking point.
"There's still a lot of growth to be had," says Jim Grefenstette, senior portfolio manager at Federated Investors in Pittsburgh. "The market's trading at 12 times next year's earnings estimates, which is not expensive at all especially when you look at where inflation is. The market's anticipating more good growth and as that delivers we could certainly continue to trend higher."
Another question will be how avid investor sentiment will get and whether any lessons have been learned from the market crash in 2008.
Wall Street and its legion of portfolio advisors and money managers across the country made enormous bets that the real estate bubble in the middle part of the past decade was sustainable.
When housing prices ballooned out of control and the bubble burst, the securities that underwrote them collapsed and brought the rest of the investing world down with them.
Such exuberance could raise concerns that investors will get overconfident coming off such an aggressive bounceback.
"We look at this as essentially a tsunami. Most people aren't aware but the second wave of the tsunami is worse than the first," says Michael Rubino, CEO of Rubino Financial Group in Troy, Mich. "The market is looking out six months at all these adjustable-rate mortgages that are coming down the pike that will be resetting. We don't feel that bodes well for the market or the economy."
Rubino thinks investors might be able to find some upside in the current market but will be better off in cash until the second wave crashes to the shore.
Market Sentiment: Neither Bull Nor Bear
Investors on the whole appear to be taking a more cautious approach. Stocks have posted a comparatively modest 2 percent gain in 2010 as sentiment has shifted from a strongly bullish stance.
The most recent survey from the American Association of Independent Advisers saw the most popular choice being "neutral," at 37.9 percent, which is well above the historical average of 31 percent. Bulls were at 35.9 percent while bears were at 26.2 percent—both below historical averages.
"For most of last year I thought it was a bull market within a bear market," Sanders says. "Within about the past few weeks we've tipped over into the point where we no longer called this a bear market. I do think we're in a phase of improvement, but the patient is still in the hospital."
The rally itself fed off companies that had taken the worst of the beating during the previous bear market, and many investment pros think this year's growth will come from large-cap strong-balance-sheet quality companies.
But Sanders thinks there still are some values to be found in so-called "junk" stocks.
"We categorize our investments in two types for trading purposes: the fundamental buys and the quick hits," she says. "This market still does offer opportunities to buy stocks that have a lot of momentum or let's say institutional interest that could jump 15 percent in three weeks and then we're out of there."
Stocks overall will continue to be a better investment than competing asset classes, says Carlos H. Lowenberg Jr., CEO of Lowenberg Wealth Management Group in Austin, Texas.
"What I see now is sort of a rotation where you're seeing quality companies start to do well and look like that's where the rest of the bull market could come from," he says. "The long-term average (for stock gains) is 8 or 9 percent over the last 40 years and I think we'll be over that, and that's strong especially when you look at competing assets like bonds and interest-bearing accounts."
ING's Landesman also expects most investors to start looking at fundamentals again. One area that has him optimistic is a resurgence in mergers and acquisitions after a moribund 2009 despite the stocks rally.
"That tells you the really smart guys, the people running companies, are seeing value out there," he says. "Those who were able to keep their powder dry and have strong enough balance sheets...are out there aggressively looking to add through acquisitions."
As for individual investors, a harsh two-year education continues to play out.
"They definitely went from buy first and ask later to ask first and buy later," Federated's Grefenstette says. "When you're coming off a bottom everything rallies, even the junk. As economic growth matures you're going to see a trend toward higher-quality growth. People will be more critical."