November 18, 2003
Commentary: The Bull Inside The Bear

Larry Kudlow speculates that the “current economic recovery could easily develop into an eight- or ten-year boom”. Jim Jubak suggests that a jump in interest rates may be the only thing that stops the Dow from surpassing 11,000 (what with Dow 10,000 a foregone conclusion). Fox’s Neil Cavuto -- dictating questions to market timers and speculators – uses a recognizable bull market slant:

“Is being too cautious costing you money?  Nearly three years after the bubble burst, plenty of investors are still too gun shy to jump back into stocks.  And they've missed out on some big profits as a result. So, is it time to stop crying and start buying to get more for your money?”

Needless to say, the insinuation that ‘cautious’ investor’s are ‘crying’ because they ‘missed out’ on the ‘big profits’ to be made in U.S. stocks represents little more than selective hyperbole.  After all, who is to say that these ‘cautious’ investors are not jumping for joy because instead of trying to time stock market bottoms they snapped up gold? 

Suffice it to say, what these and other investment commentaries bubble down to is a dearth of bull market speculation not seen since the late 1990s.  Without doubt, the days of waiting for the next Enron to happen and trying to hang Wall Street analysts are gone – the days of expecting meaningless index levels to be surpassed and ignoring Street malfeasance are back. In fact, editor of the ‘Bear Market Report’, Cliff Droke, recently said “if we get above 10,000 in the Dow I'm thinking about changing the name of my newsletter from "Bear Market Report" to something along the lines of "Momentum Strategies””. Despite Droke’s attempt to better explain this statement, what resonates is the perception that the great bear market will incontestably be over if market prices rise a little bit further; the belief being – judging by the wisdom of Kudlow, Cavuto and Droke – that great bear markets, when exhausted, can do nothing but become great bulls…

To begin with, my opinion is not necessarily that U.S. stocks are not in a bull market.  Rather, and since the markets made it through October unscathed and the U.S. economy is beginning to display signs of broadening growth (i.e. the U.S. consumer is no longer the sole driver of growth), the contemplation that the most recent stock market rebound has both a psychological and fundamental backing to it is palpable. Put another way – and in an attempt to call an apple an apple – the rally has grown bullish legs because stocks have put in a series of higher highs and lower lows, the rally has lasted beyond 1-year, and the gains have been memorable. Notwithstanding more specific definitions of bull markets, these three observations are telling of more than just another brief bear market rally. 

Even so, it is difficult to blindly accept that this bull market will replicate previous bulls.  Quite frankly, memorable bull markets are markets which reach new heights – something that is difficult to envision happening on the Nasdaq for probably a decade (at best) or longer, and something that may not happen on the S&P 500 unless many solid years of profit growth is achieved (it is noteworthy that, the 2003 bull notwithstanding, the S&P 500 remains more than 40% off its 2000 peak). With this in mind, can U.S. stocks really be a bull market if new heights are not being reached?

Has Optimism Run Amiss?

One week Kudlow thinks the boom will last 7-10 years and the next week he raises his boom band to 8-10 years.  If a few more ‘better than expected’ economic reports arrive will this mean the boom is going to last 9-10 years?  As for Cavuto’s off the cuff remark: “Nearly three years after the bubble burst, plenty of investors are still too gun shy to jump back into stocks” -- beyond ignoring the facts (mutual fund ownership is higher now than when the bear market began) one has to wonder why people automatically believe that stocks were in a ‘bubble’ 3-years ago so they can’t be in a bubble today.  Do not high valuations and record US deficits suggest that stocks could be in a bubble today?

 

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