Here's What We Need for a New Bull Market
Are we entering a new secular bull market for stocks ... like the 1980s to 2000? Or the one from 2009 to 2012, when the rose more than 100 percent?
Stocks have been doing well because the Fed is keeping rates at zero, there is no where else to put money, companies are doing OK on cost cutting initiatives, and stocks are not overvalued on an historic basis.
But that is not enough. That will not take us to new highs for several years. We need more.
To do that...to make an argument that we should continue to rally for several more years, we would need to see much more robust GDP growth (over three percent), and also more robust revenues growth, which has been anemic.
What would get us GDP and revenue growth?
1) Clarification from Washington ... a Grand Bargain that would encompass:
- deficit reduction over 10 years (tax reform, entitlement reform, and discretionary spending reform in areas like defense), and
- extension on the debt ceiling for, say, two years.
2) Clarification on Europe. First, the recession needs to stabilize, but beyond that policy initiatives that indicate a clear road to political, fiscal, and banking reforms, and an indication that Europe is truly serious about improving competitiveness.
3) A resumption of growth in emerging market economies, led by China.
4) the Fed successfully engineering a modest increase in interest rates without unleashing runaway inflation.
These are tall orders! But resolution of these issues would create a huge boost to business confidence. Capital expenditures and hiring would increase dramatically, and revenues would rise.
Finally, on a day when the Dow passed 14,000, it's worthwhile noting that the last time the Dow passed 14,000 in the fourth quarter of 2007, the valuations were higher…the forward P/E was 22 on the S&P 500…it's about 14 now.
What does it mean that the P/E was much higher? The historic average P/E for the S&P 500 is 15. So it means the market was overvalued on a historic basis in 2007, and somewhat undervalued today. An important distinction.
A tip of the hat to Steve Liesman, who asked me about this.