Is the Bear Market Rally That Started in March 2009 Over?

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

The big question on everyone’s minds these days about the stock market: is the bear market rally that started in March 2009 over?

Two ways to look at the answer to this question:

From a sentiment standpoint, I do not feel that the bear market rally was successful in taking more investors back into the stock market. As I have written many times before, bear market rallies have the purpose of making investors and the public feel that “everything is okay” again. Then, suddenly, the bear takes the market lower, often testing previous lows. The bear tries to suck as many people back into the market as it can, so it has more money to take down with it. I’ve never seen such caution out there on the part of businesses, consumers and investors.

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On the fundamental side, monetary and fiscal policies have never been so generous. Corporate profits are bursting out again. Just look at Apple Inc. (NASDAQ/AAPL). Monday night, Apple reported that the last quarter of 2009 was its most profitable ever, with net profit up 47%. Other companies (which we have covered in these pages over the past couple of weeks) have reported strong earnings as well. And it looks like Ben Bernanke is here to stay, which is what the Street wanted.

Sure, we have rising unemployment, record national debt and a fragile U.S. dollar. But the stock market is not that concerned about the long term. It is fixated on how much stock it can sell, take-over activity, and trading volume…because it is in the business of making money. Hence, the knee-jerk reaction to President Obama’s proposals late last week on restricting the banking sector from doing the things it currently does.

As a contrarian investor at heart, I read as much as I can about the economy and the stock market to get the feel of analysts, economists and investors (because they are usually wrong anyway). Right now I’m reading about the bears saying, “Bear market rally is over.” I’m reading about the bulls saying, “All these better-than-expected earnings reports will fuel the market.”

But here is some plain logic I have yet to read anywhere:

The stock market rally that started on March 9, 2009, brought stock prices up 67% by mid-January 2010. Yes, stocks went up 67% over the past 10 months. A huge gain any way you look at it.

As stocks moved higher, the valuations got dear again. Today, the Dow Jones Industrial Average trades at 29 times earnings — getting expensive once more.

Corporate profits are rising again and that’s exactly what we need. Remember, the stock market discounts events six months out. By last summer, the stock market already saw the better corporate profits companies are reporting today.

The move of the Dow Jones Industrial Average from 6,440 on March 9, 2009, to 10,717 has been (almost) a straight line up. There’s not an investment that moves straight up or straight down.

Bottom line: we are experiencing a “breather” in the bear market rally that started last March.

Michael’s Personal Notes:

If I had to choose one individual who I believe really made a difference on the technology front over the past two decades, that person would be Steve Jobs. He was fired from his own company and dealt with life-threatening health issues, but was still able to build Apple Inc. into what it is today: $40.0 billion in annual sales, $184 billion in market cap, and churning out of product after product.

While Microsoft Corporation (NASDAQ/MSFT) is still larger than Apple, with Microsoft’s $263 billion in market cap and $60.0 billion in annual sales, for me it has always been a one-product company. Apple’s ideas continue to thrive. First the “Mac,” then the “iPod,” then the “iPhone,” and now the “Tablet.”

Microsoft enabled personal computers to be user-friendly. Apple redefined portable computers and devices. In the long term, good, fresh ideas always win out.

Where the Market Stands:

There’s not much I can say about the stock market that I haven’t said in my above article today. The Dow Jones Industrial Average starts this morning down 2.2% for the year.

What He Said:

“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling — and no one is talking about deflation but me. Fed governors are still talking about inflation — they’ve got it wrong. There’s no need for me to get into the dangers of deflation, as I’ve written about them (many times) before. Let’s just put it this way: deflation is about the worse economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I’ve seen in years.” Michael Lombardi in PROFIT CONFIDENTIAL, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.