The man who almost perfectly caught the market bottom four years ago still sees promise in the stock market, even if the bull is nearing its end, writes MoneyShow's Howard R. Gold, also of The Independent Agenda.
So here we are, nearly four years into a bull market, with the Dow Jones Industrial Average and S&P 500 indexes 114% and 124% higher. Individual investors are starting to buy US stock funds again. Some experts worry that we’ve come too far, too fast.
Not Jim Stack. The veteran financial guru, who sets up shop far from Wall Street’s madding crowd in Whitefish, Montana, is still inhaling optimism along with the mountain air.
Stack Financial Management has $750 million in assets, and his InvesTech Research routinely ranks high among newsletters for its risk-adjusted performance, according to the Hulbert Financial Digest. Having called the beginning of this bull market in 2009 when virtually nobody else (including yours truly) did, he’s stuck to his guns ever since.
When I last caught up with him a year ago, he was bullish. Citing “extremes of fear,” he told me market conditions were “weighted in the investor’s favor.”
“We’re just not seeing the usual warning flags,” he said then. And the S&P 500 surged 16% in 2012—and it’s up nearly 10% since that column ran.
Now, Stack acknowledges, the bull is a year older, but he’s just as bullish.
“This bull market has strength and legs,” he told me in a phone interview. “Right now, it’s the same position we had last year, if not even stronger.”
“I don’t know if we’ll have another 16% gain, but I wouldn’t rule out a double-digit gain for 2013,” he continued.
The market has displayed “an amazing resilience,” he wrote recently.
Again, he looks to the underlying strength of the economy. “It’s surprising, [but the] economy has continued on a relatively stable level,” he said.
In fact, one big negative from last year is gone. “Housing is no longer a drag,” he pointed out. “The confidence of homebuilders is heading straight up.”
And though manufacturing remains weak, “we’re not seeing the drop in the ISM services sector you would normally see...if we were heading into a recession.” And services, of course, is a much bigger part of the economy than manufacturing is.
What about Europe? “Yes, Europe is in a recession, but European recessions do not dictate the outcome of US markets,” Stack replied. According to his research, US markets have advanced during eight of the 13 European recessions over the last 50 years.
Meanwhile, the market’s technical condition remains surprisingly strong. The Dow and S&P are approaching their 2007 highs, while the Dow Jones Transportation Average and the Russell 2000 small-cap index—two key barometers—already have set new records.
NEXT: No Signs of Bear Market or Recession
Then there’s market “breadth,” as measured by the ratio of advancing to declining stocks (A/D) . “If we were hitting new highs and A/D was going negatively or sideways...then we would have a warning sign,” Stack told me. “But we’re seeing new highs in the A/D line.”
Also, when we spoke a few days ago, Stack said that fewer than ten stocks on the New York Stock Exchange were hitting new lows every day. “It’s the second strongest signal [of that kind] since the start of the bull market,“ observed
And his own selected economically sensitive bellwether stocks “are telling us we don’t have a warning flag of an impending bear market or recession.”
Still, he acknowledged this bull is no longer young. The average bull market since 1932 runs 3.8 years. We’re already there.
Yet it is an average: Five of the 16 bull markets since then lasted five years or more, and three (1949, 1974, and 1990) went on for at least six years. That’s Stack’s best guess for this bull’s life span.
“We’re undoubtedly in the second half of this bull market, and possibly in the last third,” he told me. That’s because he doesn’t see anything that will derail it soon—either a sharp economic slowdown as in 2007 or sudden increases in short-term interest rates.
“Bear markets do not come out of thin air,” he said.
And despite their huge run so far, stocks aren’t that expensive. The S&P 500 changes hands at around 17 times the last 12 months’ reported earnings, slightly above the 14.5 median, but with much lower interest rates. “We’re not seeing the valuation problem we saw in 2007 or back in 2000,” Stack said.
The post-election year is usually the weakest of the four-year presidential cycle. And stocks have moved up sharply from their November lows, so we’re bound to have a pullback at some point. Yes, we sailed past the fiscal cliff, but we have the automatic spending cut “sequester” coming up soon, and after that a more protracted budget battle that could take its toll.
And, oh yes, there’s Europe (yawn) to scare investors with its occasional flare-ups. So, we may have some ups and downs—otherwise it wouldn’t be a stock market, right?—but I wouldn’t bet against stocks just yet.
“The bull market is getting longer in the tooth, but that doesn’t mean it’s on its last legs,” said Stack. This maturing bull ain’t dead yet.
Howard R. Gold is editor at large for MoneyShow.com and a columnist at MarketWatch. Follow him on Twitter @howardrgold and catch his coverage of politics and the economy at www.independentagenda.com.