BEAR MARKET SHOWS ITS TEETH
Stocks up more than 13% since February
Fakeout? Or real deal? The most- hated bull market in Wall Street history still has disbelievers after a rocky start for stocks in early 2016 — and despite a rebound that erased all of the early- year losses.
Wall Street is debating whether the stock market rally since mid- February that pushed stocks up more than 13% and back into the black for the year has real staying power or whether it’s a fleeting bounce that will end with the market reverting to its early- year downward trend and lead to the first bear market, or 20% drop, since the 2008- 09 financial crisis.
Doug Ramsey, chief investment officer at Leuthold Group, is one skeptic who
thinks stocks are currently enjoying a “bear market rally,” or a brief period of rising prices that ends without new record highs and a bear market.
A definition of a bear market rally is a 5%- plus rally following a stock market correction, or drop of 10% or more, but doesn’t result in a new record high.
What worries Ramsey? The Federal Reserve is embarking on a rate- hiking cycle. Stocks are selling at prices relative to earnings that are above long- term average valuation levels. Poor earnings momentum continues for U. S. companies. And market leadership is still dominated by “defensive” stocks and sectors, such as utilities and consumer discretionary names. Typical bull market leaders, such as financials and banks, are not participating in the rally since mid- February in a major way, he adds.
“The quality of the rally is questionable, and that bothers us,” Ramsey told USA TODAY, adding that falling longterm U. S. government bond yields is signaling stock investors’ economic forecast might be too upbeat.
Bear market rallies often lure unsuspecting investors back into the market, Ramsey says, setting them up for losses once the decline in prices resumes.
“Bear market rallies are dangerous because they look like a new bull market,” Ramsey said.
Bulls counter by saying the aging bull, which is now in its seventh year and the third longest in history, can continue to head higher and carve out fresh all- time highs before it rolls over for good.
Brian Belski, chief investment strategist at BMO Capital Markets, says he’s sticking with his call for this bull to last another eight to 13 years.
He says 2015 and 2016 are “transitional” years for the U. S. market, as it transitions away from old drivers, such as zero rates, credit- driven investment plays, emerging- market growth and commodity boom, and back toward “high- quality” U. S. large- cap stocks.
“Being bullish is about faith and fundamentals,” Belski said. “When the U. S. economy and earnings improve, interest rates will go up, and when they do, mom- and- pop investors in Willmar, Minn., will sell their bonds and buy real U. S. companies.”
Richard Bernstein, founder of Richard Bernstein Advisors, says it’s hard for investors to grow wealth when they fear the market. If the Fed goes slow with interest rate hikes and the profits recession ends soon, the bull market has room to run, he says.