Bull Market in Stocks Is Ending: Strategists
The bull market in stocks, which began two years and two months ago on the tail end of the deepest recession since the Great Depression, has handed investors gains of 80 percent.
But, according to fund managers and analysts including Standard & Poor's Chief Technical Strategist Mark Arbeter and Capital Advisors Chief Executive Officer Keith Goddard, the end is nigh.
Europe's tumultuous debt woes, Japan's recession, the end of the U.S. Federal Reserve's massive bond-buying program and peak profits among American companies signal a slowdown in the pace of equity gains that may, in a worst-case scenario, result in a decline of as much as 20%.
Calling stock-markettops and bottoms is more art than science, though in a research note last week, S&P's Arbeter said stocks will fall 15% to 20%, perhaps more, with a slide extending into next year.
His evidence: A breakdown in commodities, a potential intermediate- to longer-term bottom in the U.S. Dollar Index, lagging emerging markets and a rise in Treasury yields. All of which raise costs for U.S. businesses, crimping profits.
"In our opinion, this reflects concerns about the economy, and many times, is a bearish omen for the overall stock market," Arbeter writes, noting recent outperformance in sectors like consumer staples, health care, telecom and utilities.
Although Arbeter made his call through the prism of market technicals, other stock-market watchers agree with his bearish assessment. Nouriel Roubini, the economist who rang the warning bell ahead of the global financial crisis in 2008, recently said unemployment will continue to rise in the U.S. over the next year. Roubini has frequently warned of global economic woes, and he continues to see problems in Europe as a threat to a global recovery.
The threats to the future of the bull market read like a laundry list of events set to occur at the end of days. Inflation from rising commodity, agriculture and materials costs is a major concern, as is the end of the Federal Reserve's purchase of $600 billion in U.S. Treasurys, known as QE2, which provided a massive boost of liquidity that helped to increase asset prices.
There are several other concerns that aren't mentioned nearly as much as inflation and the end of the second round of quantitative easing. Fitch Ratings cut Greece's credit rating on Friday due to the risk of a sovereign default. Last year, the European Union and International Monetary Fund bailed out Greece, but even that rescue may not be enough to help the country manage its debt and deficit. Worry continues to mount over a potential debt restructuring.
In the U.S., economic reports have suggested sluggishness ahead. Unemployment remains at 9%, and new jobless claims have stayed stubbornly above 400,000 each week.
First-quarter GDP has been initially pegged at 1.8%, which is anything but robust.
And in the past week, the Conference Board said leading economic indicators fell 0.3% in April, the first decline since June 2010, and a separate report showed housing starts and building permits continue to drop.
Bullish investors have pointed to earnings performance as one reason the market still has legs. But the excitement over first-quarter earnings, which recently wrapped up with Wal-Mart's release, doesn't quite match reality.
Bespoke Investment Group's market analysis says out of 2,132 U.S. companies that reported earnings this quarter, 59.5% beat estimates.
"This is by far the lowest quarterly 'beat rate' reading of the bull market, and it's 7 percentage points below the 'beat rate' last quarter," Bespoke writers noted in last week's post.
There has also be a shift in leadership, another potential sign of an impending market swoon. Lower-quality stocks led the equity market higher until about a month ago. Both the Russell 2000 and the S&P 500 ($INX) are up 6% this year — a far cry from bear-market territory — but the small-cap index is down 2% over the past month as the S&P 500 has held steady.
Despite mounting evidence, there is much conflict about whether this is the end of the bull market's run.
"Bull markets, as they say, have been killed historically by restrictive monetary policy. I'm not aware of a bull market being killed my anything else," says Mark Schultz, fund manager at M&T Bank. "We're a little ways away from that, according to the authorities at the Fed."
Other fund managers and investment advisors are a little more concerned. TheStreet spoke with several bullish and bearish investors and got their take on whether the bull market is dying. Their views are presented on the following pages.
Brian Peery, Hennessy Cornerstone Growth Fund
"It's not about timing the market, it's about time in the market," says Brian Peery.
"I've never been good at picking tops or bottoms. I'm going to invest for the long term, so I want to pick high-quality companies that are going to be around in five years and make sure I'm not paying too much for them."
Peery is the co-portfolio manager of the Hennessy Cornerstone Growth Fund (HFCGX), a $200 million fund with a tilt toward small- and mid-cap equities such as Mercer International (MERC) and Atlas Energy (ATLS).
"There's always going to be that wall of worry. You could make a case for the end of the world being near," Peery says.
"But if you can separate the individual companies and their performance from the overall economy, there are a lot of cash-rich companies that are making a lot of money that are sitting on this capital."
Peery is solidly in the bullish camp of investors, as he says a hypothetical 20% market pullback would "be a huge buying opportunity." But even he acknowledges the challenge investors face with the weak economic rebound.
"We're not in an environment where the economy is rip-roaring, so you're only getting incremental growth on the top line," he says. "The economic numbers haven't been all that great. If you don't have a job, the recession is still going on. But people are feeling more secure about spending and they're loosening the purse strings a little."
Peery says it will still be a stock pickers' market, and that investors have to look for high-quality companies selling at a discount. He says there are an abundance still out there, including Dell and, in particular, Chevron .
"Chevron is making a truckload of money," Peery says. "What do you do with that $12 of earnings per share? You could increase your dividend, you could invest in infrastructure to make yourself more profitable, or you could do some M&A. We're seeing companies like Chevron that are yielding high."
Peery advises people to take a long-term approach, as it's still early in this bull market in his eyes.
"We could have a dip along the way and have continued growth, so I would look at any time the market comes down as potential buying opportunities," he says. "I still think valuations are relatively low."
Keith Goddard, Capital Advisors
Keith Goddard, president and CEO of Capital Advisors, says there are two important things that are making the climate more difficult for investors: the end of QE2 and the peaking of profit margins.
Based in Tulsa, Okla., with $900 million in assets under management, Goddard says that while investors will debate whether interest rates will rise or fall on the termination of the Fed's quantitative easing in June, there is no debating the market will transition from an environment of easy monetary policy to one of incremental tightening.
Secondly, Goddard argues that profit margins are peaking. "We're right up against records, and that series is mean-reverting. It's one of the most mean-reverting elements of capitalism," he says. "Profit margins will come down at some point. We think it's starting."