Update: Ten Reasons to be Bullish

by Matt Malick

Since the summer of 2009, analysts and strategists of all stripes have been looking for a “correction” to the historic stock rally that started in March of 2009.  It seemed that every major player on the Street - bull and bear alike - had been predicting a 10% to 20% market adjustment.  Throughout history, short-term market declines have been commonplace during multi-year bull markets.  Unfortunately, theorizing about a normal correction and actually living through a gut-wrenching drop in stock prices are different stories altogether. 

In late April, the Standard and Poor’s 500 index hit its near-term high of over 1200.  A 10% correction from that level would put the index at 1080 and a 20% correction would take the index to around 960.  The S&P 500 presently stands at about 1125.  While there is no guarantee that we are now experiencing the much-anticipated 10% to 20% correction, these figures indicate that further short-term losses would be exactly what most market experts have been predicting.  

The added market volatility over the last several weeks is doing its job.  It is bringing intense fright  and discomfort to investors.  The confidence that was building in the market is evaporating.  The major financial news networks are tripping over themselves to line-up interviews with all of the prominent bears.  Fund managers have turned bearish, individual investors have reaffirmed their unwillingness to enter equity markets, and bullish investors have begun to second-guess their theses . . .

Remember, sentiment has historically been an effective contrarian indicator, i.e. the crowd is normally wrong.  In early 2000, everyone was heralding a new technological revolution that was going to increase productivity and send stocks to the moon.  In early 2009, the consensus held that the U.S. was on the verge of a depression and that stocks would pile-up ever greater losses.  In both of these extremes, the consensus was wrong.

Despite the endless stream of negative headlines over the past several weeks, here are ten reasons to be bullish about the intermediate-term prospects for the stock market:

1. The Standard and Poor’s 500 and the Dow Jones Industrial Average are still more than 20% below their all-time highs of October 2007
2.  The yield on the 10-year U.S. Treasury Bond is 3.46%
3. The estimated earnings yield (2010 estimated corporate earnings divided by price) on the S&P 500 is 7.25% .  The estimated 2011 earnings yield on the S&P 500 is 8.55%
4. Gold has reached another all-time high (over $1,210 per ounce), even as countless television commercials tout the opportunities available to individual investors to avail themselves of “cash for gold” (the greater the percentage of a population that is involved in a mania, the less chance it is sustainable)
5. The overwhelming consensus - from Ph.D. economists to the shoeshine man – is that government sovereign debt is the crisis du jour (you are rarely bitten by the snake that you see)
6. In April, the government reported that payrolls rose for the 4^th straight month, posting the best month for employment in 4 years
7. In the fourth quarter of 2009, U.S. GDP growth reached 5.6% and in the first quarter of 2010 U.S. GDP growth hit 3.2%
8. Well over 80% of S&P 500 companies that have reported 1^st quarter 2010 earnings have once again surpassed analysts’ earnings expectations
9. In April, U.S. retail sales climbed for the seventh straight month
10. U.S. consumer spending has increased for six straight months through March

As you well know, it is impossible to predict day-to-day stock market moves.  Right now, the “headline risk” in the market is extraordinary.  Recently, it has been difficult to find a positive report anywhere.  However, over the intermediate-term, we continue to believe that stocks are out of favor, especially when employing a buy-and-hold strategy.  The recent market turmoil is decreasing enthusiasm and will thereby likely prolong the sustainability of market gains over the next few years.