Ride the Bull!

By Dr. Jason White
Family Investment Center

We all still carry the scars of the grizzly bear market that ran from October, 2007 to March, 2009. It will be etched into our investment consciousness for some time, which is a good thing if we choose to rededicate ourselves to the goal of building long-term family wealth.

I believe the worst of the bear market and the economic recession is mostly behind us. Economic activity is picking up nicely, and job growth will follow in the months and years to come. This recession was a 2-1/2 year demonic slide, and it will probably take nearly that long to dig ourselves out and return our economy to full employment again, which is generally defined as an unemployment rate of about 5-percent nationally. We are currently just a tick below 10-percent.

The Federal Reserve is taking the first steps toward tightening relaxed monetary policy to prevent price inflation as the economy and the employment picture improves in the United States and around the world. The discount rate rose a quarter-point and all the signals are for continued rising rates as the economy strengthens.

For these reasons, and the ones that follow, I believe we are in the heart of a bull market rally that will likely continue for several years into the future, if not even longer. A simple reversion to the mean in stock prices would be a rise of nearly 40-percent from existing market levels for the average company in the S&P 500.

Many companies are starting to report rising earnings from operations that have been generated from top-line (sales) strength, rather than earnings generated from cost-savings and job cutbacks. This is a big positive indicator of things to come.

In addition to top-line revenue growth, American business has rung much expense excess out of their profit-and-loss statements. This should provide for many upside-earnings surprises in 2010 and 2011.

States are starting to see modest increases in some tax revenue streams, particularly in sales tax, and property taxes are stabilizing as most of the depreciation in the market value of housing stock has already been realized.

Companies that have been running very lean-and-mean inventories are now having to restock more often and to higher levels. This will help the manufacturing sector in 2010 and beyond.

The federal government fiscal stimulus for 2010 is large and growing larger. Yes, I lamented the size of the President’s proposed budget deficit as too much for our rebounding economy in last week’s column, and I still hold to that position. That said, the fiscal deficit spending stimulus will still have a short-run positive effect on economic growth and employment until we reach full employment, which as I said earlier may take a couple of years.

Take the bull by the horns. If you have been on the sidelines waiting for some normalcy to return to the markets, I think this is a good re-entry point for you. Market-timing is generally folly, but if you have taken some equity weight out of your portfolio, I think it is time to saddle up that bull and ride again.