Why the stock market rally isn't over yet

For every argument that the bulls make to support their belief that the market's runup is for real, a counter-argument is readily presented by skeptics.

By The Fiscal Times Mar 29, 2012 7:15PM
Stock MarketsBy Suzanne McGee, The Fiscal TimesThe Fiscal Times

Has March Madness infected the stock market? The Standard & Poor's 500 Index ($INX) had raced past the 1,400 level before dropping back below that mark early Thursday.

Even with the latest pullback, the index has more than doubled in value since hitting bottom during the financial crisis three years ago. Given that the average annual market gain, according to the folks who make a living tracking these things, is closer to 7%, that's a great feat.

On the heels of that performance -- achieved despite tremendous volatility and uncertainty surrounding the prospect of another recession or even a second global financial crisis triggered by the European government debt mess and the plight of that continent's financial institutions -- investors are still debating whether that rally can keep going. Fresh concerns about economic growth are only adding to the questions.

Certainly, the rally has already been the subject of plenty of worry and angst. For every argument that the bulls make in support of their conviction that the market's runup -- and particularly its most recent jump since the lows of last October -- is for real, a counter-argument is readily presented by skeptics:

• True, stocks are reasonably priced, on average; hey, even Apple (AAPL), whose stock price has nearly doubled from its 52-week to low to trade at around $618 a share, still only commands 17.6 times earnings.
• Yes, the housing market seems to be beginning a recovery -- but it's climbing out of a deep trough.
• Sure, the economy looks healthier -- but the rate of corporate earnings gains is forecast to be smaller going forward than it was last year, and there are still big economic headwinds, like the stubbornly high rate of long-term unemployment.

Folks working within the same firms don’t even agree with each other. For instance, Sameer Samana, the international investment strategist at Wells Fargo Advisors, earlier this week argued that the stock market now feels overbought and its advance "very similar to last year's"; that 2011 rally, of course, ended in a summer stock market rout. The environment, Samana suggests, is reminiscent of one in which "the easy money has probably been made and the bulk of the rally is probably behind us. We see this as an opportunity for traders to trim positions and take profits."

Meanwhile, Gary Thayer, Wells Fargo’s (WFC) chief macro strategist, suggests that an improvement in investor sentiment is likely to continue to buoy stocks; this month, he argued that the bull market has further to run and that investors should be buying stocks on any pullbacks, such as the days last week when the market ended up in the red.

Ultimately, investors trying to figure out whether the rally can possibly keep going may have to resort to reading the tea leaves -- those tiny signals that may prove critical (but only with 20-20 hindsight) or that may end up being irrelevant.

Sam Stovall of S&P Capital IQ finds comfort in pointing out that the back-to-back gains of about 11% in the fourth quarter of 2011 and the first quarter of this year don't necessarily mean that the good times have to end. The S&P 500 has, he says, gained at least 10% in the first quarter of a year eight times since 1945. In six of those times, the gains were followed by another advance in the second quarter of the year. (Henry Ford may not have drawn comfort from this, given his conviction that "history is bunk," but lots of investors trust historical patterns.)

The monthly reading of investor sentiment put out by State Street Associates is another bullish sign. That index, crafted by Harvard University professor Kenneth Froot along with State Street's Paul O'Connell, measures investor confidence or risk appetite by analyzing actual buying or selling patterns. The fact that the confidence index rose in March may be less significant than some of the data that lies behind that finding: indications that big institutional investors have started buying more. Except in major market panics (like the events of 2008), institutional investors try to remain as unemotional as is possible in such an emotion-driven place as the stock market: They buy and sell based on their analysis of fundamentals.

"Institutions have been content to play the role of liquidity provider over much of the recent rally, taking the other side of non-institutional trades," Froot said in a statement accompanying the monthly State Street release. "This month they have engaged in more liquidity-taking behavior, adding further to core equity positions."

Perhaps most intriguing is the fact that the rally may be broader than it might appear looking only at the S&P 500 index. True, the big winners among mutual funds have been the large cap growth funds -- not surprisingly, as those are the kinds of funds most likely to have owned shares of Apple, which has driven a lot of the price gains. And yes the 100 largest stocks in the S&P 500 have been among the biggest winners. It's all about embracing instead of shunning risk: Citigroup's (C) stock is sharply higher so far this year. But risk taking has spread down throughout the market, say some pundits, with smaller-cap stocks also recording sizeable gains.

If the rally isn't over until the fat lady sings, odds are that she is only starting to warm up for her performance.

Related Links:
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The Entitled States of America: We Want More!
The American Dream Is Fading, Even for Millionaires

Mar 30, 2012 10:36AM
People can put whatever spin they want to put on it to make it look like it will go the way they want it to go. What did this author say exactly 1 year ago? Did she get it right then? If not why would I believe she knows what she is talking about now? The article fails to mention the driving force in the economy for the last 65 years. The baby boomers. They began turning 65 last year. 10,000 a day will turn 65 for the next 18 years! How long will the "rally" last? Does it matter? After all it is only a "rally" and that is what is the most worrisome. Wall Street will have to make it without the boomers. Good luck with that.
Mar 30, 2012 11:45AM

"Why The Stock Market Rally Isn't Over Yet"


That's because those that control and manipulate the market don't want the rally to end. 

Mar 30, 2012 9:29AM

While I don't necessarily agree with some of the conclusions, this was a nicely done article.  Well researched and referenced. 


Too bad "Someone (TNicos)", has to try to steer the discussion toward rancourous political debate.

Mar 30, 2012 11:59AM
It will end when the Fed quits giving the banks free money . So now the tax payers are paying for the wall street bonuses and banker bonuses. THANKS FOLKS!!!!
Mar 30, 2012 11:22AM
Samara and Thayer do not have different visions of the future.  Samara says the market will pull back after it rises a bit more.  Thayer says the market will rise a bit more before it pulls back.  Like any good fortune teller neither can be wrong.  And they get a nice pay for this.
Mar 30, 2012 10:57AM
You're right the stock market rally isn't over just yet!!


Mar 30, 2012 12:34PM
The party will end when they raise interest rates. This will happen after the elections when the government imposes austerity measures on the public, higher taxes, higher interest rates, and reduced benefits. Even with the fraud induced rally in the market now, austerity will trump it and people will see the market at 2008 levels or lower.
Mar 30, 2012 3:20PM
Seems like every article, regardless of the subject, is followed by blogs that insult one political party/person or the other. Does anyone really believe the president is not interested in businesses doing well? Do you honestly thing that he or anyone in his party would like to see the economy worsen? Sure, he may want businesses to operate with some accountability (eg. the environment), but to say that he is anti-business is nonsense.
Mar 30, 2012 1:46PM
You are aware the Fed forgave 3 billion dollars that GM owed the tax payers so profits look good now.
Mar 30, 2012 2:11PM
.. and there are still big economic headwinds, like the stubbornly high rate of unemployment.

JOBS for Main Street (repeat over and over).  The economic growth will not be sustainable until corporations, small business and government focus on the unemployment headwind.  Luke warm public policy and timid private sector courage is what we have .. when what we need is bold measures that attack the problem, head-on.  JOBS, JOBS, JOBS should be on the lips of every businessman, labor union and politician in America.

Mar 30, 2012 2:53PM
Time to put the blame where it belongs on the big banks, if your a victim of id theft it's the banks fault not yours they have to have a valid signature to open the account if not it's fraud on there part. Sue them into bankruptcy.
Mar 30, 2012 6:13PM
Stocks are a major bubble. According to hundreds of years of market history, we are at bubble valuations when we consider that dividends are all time low. These low dividend ratios appear at market tops. Not at market bottoms. Google for HAVE WE SEEN THE STOCK MARKET BOTTOM to understand why 2009 was not a major bottom for the market. Worst is still ahead of us. This is like Tulip Mania, South Sea bubble. It will go into history books for centuries to come! Do not risk your lifetime earnings in speculation. 1980-1990s stock run was a one time 20 year period that has never happened for the last 400 years! The odds of it happening again is low. Demographics favor selling pressure in US, in China, in Japan and in Europe!!! Only thing Uncle Sam knows to do is to print money. This is analogous to the end of Roman Empire.
Mar 30, 2012 4:37PM
While the reasons for the market going up or down are occasionally goofy, the bottom line is whether investors think that a given stock will produce more profits, thus making the stock worth more. U.S. companies have been making record profits over the past 3 years, thus the stock market is up ~100%.

Those that look broader than a given stock or a mutual fund look to the future to make an educational guess on whether Europe or China will grow, thus buying more of our products. Or whether there may be a future war (Iran?) that will cause lots of cost increases, thus lower profits. Or issues like jobs, consumer confidence, etc.

No doubt, there are a number of people on Wall Street that know when something positive is going to happen and they buy stocks before we find out about the situation. I don't like this, but it is one of the penalties we pay for being in the stock market.

From my end, I have been an optimist and have invested a significant amount in U.S. equities. I've been rewarded for being an optimist.

Mar 31, 2012 6:24PM

The rally isn't over untill the next opportunity to buy! Buy low sell high. Live off the gain!


Mar 30, 2012 2:50PM
Time to bankrupt mastercard and visa, if your a victim of id theft from these two companies they are going to be liable. Class action suit will cost them billions.
Mar 30, 2012 12:08PM
Watch the LEI.  LEI pretty good.  Buy autos, namely Ford and GM, and hold for a couple years as they are still in bottom half of the cycle.  Steadily crawling out of a trough of low demand.  Pent up demand is huge and the steadily growing sales will lead to exponential profit growth for several years running.  JMO, Ford will do better as they have streamlined their mfg operations and are the smaller but growing guy on the block when it comes to BRIC markets.  GM has more to lose than to gain as their gobal footprint is much bigger than Fords.  Both however will do well as sales volumes rise despite some variances in market share percentages.
Mar 30, 2012 2:08PM
This rally isn't over yet.  SO hurry and put your money in it real quick.  Before the prices go down. 

Mar 30, 2012 2:21PM
By the negative response to my earlier comments, this is a decidedly liberal writing space with regards to this writer.  The sharp increase from 2008 is bunk.  How much of that severe drop in 2008 was due to the market panic that occurred as a result of the anticipation of a unfriendly administraiton to business.  I see nothing in this article that has not already been flip-flipped by Anthony M.
Mar 30, 2012 8:27AM
The only upward movement in the stock market will be realized when Obamacare is declared unconstitutional and if Helicopter Ben continues Operation Twist in order to to try to get the Community Organizer in Chief or Mr. Flexibiity re-elected.
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