Stocks Bull or Bear Market, Case for a Bull Stock Market

By: Hans_Wagner

Is this a bull or bear market? After a rally of more than 50% by the S&P 500, some investors are debating the question of bull market versus bear market. Moreover, those of us who have benefited from this rally are taking the prudent step to evaluate whether this is a bull or bear market.

In an earlier article on bull or bear market, I evaluated the case for a bear market rally. To continue the discussion of bull market versus bear market, it is time to examine the bull market side of the debate. Not surprisingly, there are important fundamental factors that indicate whether a new bull market is here to stay.

Falling U.S. Dollar

In the bull or bear market deliberation, a falling U.S. dollar contributes to the growth of the economy by encouraging exports to grow while pushing up the price of imported goods. The higher cost of imported goods tends to support companies that manufacture their products within the U.S.

We should expect the value of the U.S. Dollar to fall further over time as the global economies try to balance the growing debt of the U.S. A falling U.S. dollar encourages sales of U.S. made goods and services as they become more price competitive. As a result, a growing export industry will be a major contributor to the rebound of the U.S. economy and help to encourage a bull market. Any company that exports its products will benefit from a falling dollar as U.S. made industrial products will be less expensive than those made in other countries. In addition, the big multinational companies will see a positive affect on their earnings due to the falling value of the dollar. As a result, the U.S economy will benefit from rising exports that will encourage the tilt the debate on a bull or bear market in the favor of further rally.

Do Not Fight the Fed

There is an adage on Wall Street that you do not fight the Fed. In the discussion of bull or bear market, the market will rise as long as the Federal Reserve is making low cost money available. In the last year, the Federal Reserve has been very aggressive in lowering short-term interest rates to near zero while providing substantial amounts of liquidity to the financial sector. All this money encourages business women and men to borrow and invest, perhaps even speculate. The availability of this money encourages investors to buy securities that will create a return. Some of the best opportunities remain in the stock market. Investors who fight the Fed have found that they miss the rise in the markets. As long as the Fed is offering so much money for next to nothing, it encourages the markets to rise.

The Obama Administration is spending more money to try to stimulate the economy though direct payments to consumers, funding of construction projects, and payments to state and local governments. This money becomes part of the economy helping to drive up the Gross Domestic Product. For example, the cash for clunkers program helped to clear out a large inventory of new cars and is helping the auto industry to increase their level of production. While some of the sales from this program will have taken sales from later months, in many cases they caused people who did not intend to buy a new car for years to trade in their old car for a new one.

By encouraging an increase in asset values, the Fed tries to create wealth, or at least the appearance of wealth. The rise in the value of stocks helps to raise the wealth of the country. This might be an artificial rally in asset prices similar to what we experienced recently in home values. However, it creates opportunities for those who are astute enough to take advantage of the opportunity.

In the past, the Fed helped to create the dot.com bubble, then the real estate/credit bubble. The low cost money that is now available will encourage another asset bubble to come along. The low cost money helps to encourage a new bull market. What will be the next asset bubble that will come along? Very little has been said on this subject in the bull or bear market discussion. I suspect the next bubble will be in commodities, though it warrants further study.

Wage Inflation under Control

One of the arguments in the bull or bear market debate given by those who believe the market will fall is inflation will return caused by the massive amount of spending by the Federal Reserve and the U.S. deficit. With the high level of unemployment and especially underemployment in the U.S. it will be very difficult for inflation to return.

According to studies from Crestmont Research, stable inflation at low levels is a positive for higher PE ratios. When inflation rises or falls it tends to cause PE ratios to fall. While a sad condition for those who are unable to find meaningful work, this high unemployment and underemployment problem will keep inflation under control. Lower and stable inflation is a positive for higher PE ratios and supports the stock market.

Company Profits Set to Expand

In the past 18 months, companies have significantly reduced their costs to bring them in line with their revenues. In many cases, they have been successful. These vicious cost reductions will help these companies to increase their margins and profits once their revenue begins to grow. Expanding margins fall directly to the bottom line. Earnings growth gives investors comfort that a company’s stock will be valued more in the future than it is now.

According to Standard & Poor’s, operating earnings will recover over the next 12 months returning to approximately the level reached at the end of 2007. The growth in earnings will contribute to strength of the stock market, as it helps to justify the higher PE ratio now in place. Earnings growth is an important component to vitality in the stock market. As corporate earnings grow, so will the market.

The Bottom Line

In the bull or bear market debate, the early signs of an economic recovery provide a solid foundation for further expansion of stock market prices. While we may not see a continuation of the dramatic rise over the last six months, the market will keep looking forward to improvement in important sectors of the economy. The most important factor is the vast amount of money being made available. The “don’t fight the Fed” adage has proven itself in the past and will do so this time. Stock market investors should pay heed and remain invested in the sectors that are likely to perform the best in the recovering economy.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Copyright © 2009 Hans Wagner

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