6 Reasons to Bet on a Big Bull Market
After the stock market crashed in 1929, it took until July 1944 for investors to break even -- even after accounting for dividends. Similarly, after the 1973-74 bear market and the "stagflation" that accompanied and followed it, it took until October 1983 to break even, after taking inflation into account. But both horrid stretches paved the way for prolonged bull markets.
Unfortunately, shareholders are living through another wretched multiyear period. Almost since the calendar flipped from 1999 to 2000, stocks have been a bust. We've lived through two giant bear markets -- a 47.4% loss during the 2000-02 downturn and a 55.3% decline during the 2007-09 calamity. From January 1, 2000, through April 16 of this year, Standard & Poor's 500-stock index returned a meager 1.3% annualized.
Tobias Levkovich, chief U.S. stock strategist at Citi Investment Research & Analysis, a unit of Citigroup, says he thinks a major bull market will begin within the next year or so. He defines such a market as starting only after the major stock indexes reach new price highs, which hasn't happened yet.
Levkovich's arguments are provocative. Here are the six reasons he believes we're on the cusp of something wonderful:
1. The long decline in housing prices is nearing an end. The excess supply in housing is dwindling. When home prices finally bottom, it will mean more employment for construction workers, real estate agents and people in related industries. It will also staunch the bleeding in the mortgage and banking industries. Plus, it will help revive consumer confidence.
2. The U.S. is undergoing a manufacturing rebirth. Higher wages in China are prompting some companies to relocate factories to the U.S. Ford and Emerson Electric recently brought back some manufacturing to the U.S., and Intel is building three new plants here. Boston Consulting Group sees China's edge eroding because many Chinese workers this year received wage increases of 15% to 20% and because of high transportation costs to the U.S.
3. The "echo" baby boom is ready to invest. The children of the baby-boomers will soon enter the 35-39 age bracket -- the time in life when, Levkovich says, they get serious about investing. He has studied actions of that group from 1900 to the present and finds a strong correlation between the size of that cohort and the direction of the S&P 500. He says the echo boom will more than make up for the pressure their parents put on stocks by selling investments to pay for their retirement.
4. Technological innovation is still spreading. Increased adoption of smart phones by individuals and companies in developed and emerging countries will lead to increased spending on these products, as well as on technology infrastructure, including better security software, faster chips, longer-lasting batteries and more broadband spectrum. The U.S. still dominates tech.
5. The U.S. is becoming less dependent on foreign energy sources. New discoveries of oil mean a near-tripling of production in the Gulf of Mexico by the end of the decade. Meanwhile, fracking and other advanced drilling techniques are dramatically increasing natural gas production and lowering its price. Also helping are tougher standards for auto fuel economy, which means we're using less gasoline. What little oil the U.S. will have to import, Levkovich says, will come from Canada and Mexico. Energy independence would help our trade balance.
6. A solution to our fiscal crisis is on the horizon. In 2013, Levkovich thinks, Democrats and Republicans will overcome their bitter differences and adopt a debt reduction plan that will include both higher taxes and cuts in entitlement programs. If that doesn't happen, he thinks bond investors will force a resolution in 2014 by selling Treasury debt and forcing up bond yields. "We continue to think that investors are unwilling to pay up for equities while the continuation of budget deficits and growth of national debt erodes the foundation of economic progress," Levkovich says.
Levkovich finds a lot of skeptics among individual investors, who continue to yank money out of stock funds, as well as professional investors, many of whom have decreased their allocation to stocks. But that's just dry powder for the next raging bull market.
Steven T. Goldberg is an investment adviser in the Washington, D.C. area.
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