Too far, too fast?

The stock market rally has been fast and furious. But based on historical norms, it shouldn't be all that surprising.

By John Reese Apr 9, 2010 6:18PM

As the market has continued to rally, one of the big bearish arguments has been that stocks have come too far, too fast. But have they?


Not according to Barry Ritholtz, who called both the '08 crash and the '09 recovery. In fact, Ritholtz says this rally is in line with typical secular bear market recoveries. Historically, the median secular bear has lasted about 29 months, and involved a 56% drop — just about what we hit in the recent bear, though much more quickly, he tells Then, on average, a 70% rebound has followed over the next 17 months.

“Since we fell much quicker than that, it’s not a surprise that we have bounced 60%, 65% in just 12 months,” Ritholtz says. He thinks a decent sized correction could be "a quarter or three" away, but as long as interest rates stay low, he says it's unwise to short stocks.


Ritholtz isn't the only top strategist seeing more room for the market to run.


Fund manager Mario Gabelli told CNBC this week that businesses have cut costs and are sporting very healthy balance sheets, which will result in "very good" first-quarter earnings. He also says the market still has a margin of safety, though it’s not as big as it was a year ago. And he thinks equities will offer “very generous” returns relative to fixed income investments over the next three or four years.


Another top value fund manager, Bill Nygren, said that stocks are still cheap, even after the big rally. He told Barron's that investor pessimism remains fairly high. “Yet if you take away financials, the yields in the stock market are unusually high compared to the bond market," he says. While stocks have risen very far very quickly, he says that's more of a function of the exceptionally low valuations that existed back near the market bottom. “Most of the time, we are buying stocks at 60% of what we think they are worth and selling them at 90%,” he said. “Last March we were selling at 60% of what they were worth and buying at 40%.”


Liz Ann Sonders, Charles Schwab's chief investment strategist, also says she thinks a "wall of worry" is still in place for the market. She says valuations remain modest for a low-interest-rate environment, and that a bear market in bonds could trigger a "melt-up" in stocks. She thinks the market will grind higher, though with more volatility.


James O'Shaughnessy -- one of the investors upon whom I base my Guru Strategies -- says, meanwhile, that he's finding a lot of value in strong dividend payers. In an interview with CNBC, he said he's keen on high-dividend stocks both in the U.S. and abroad. And, as for concerns about interest rate hikes, he said that high-dividend plays tend to do well when interest rates are rising.


Another guru who sees more room for stocks to run: Wharton professor and author Jeremy Siegel. He told Bloomberg this week that he thinks the economic recovery will be stronger than many think, and that stocks have another 10% or 15%, or maybe more, left to run.


Finally, star hedge fund manager Leon Cooperman says we're still early in the bull market. He told Fortune that valuations are reasonable, and that investor sentiment is a positive in terms of laying the groundwork for more gains, as individual investors continue to dump equity mutual funds and buy up fixed income funds.


Cooperman says his firm is underweighting high price/earnings stocks, utilities, and some consumer discretionary firms. “We’re eclectic and very bottom-up in terms of quality-growth franchise-type companies,” he said.


John Reese is founder and CEO of, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book, "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".



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