Fisher Investments Editorial Staff
Investor Sentiment, Media Hype/Myths, Market Cycles

Remind Me

By, 02/16/2010

  Story Highlights:

  • Though oft overlooked, there are plenty of reasons to be bullish. 
  • Emerging Markets' growth, rebounding business investment and earnings, attractive stock valuations, and prevailing negative sentiment are among current bull market drivers.



With recent stock market volatility dominating headlines and instilling fear in investors globally, it's easy to quickly forget the myriad positives existing today that should underpin a continuing bull market. Though oft overlooked, reasons to be bullish are plentiful.


History Says More Bull in Year 2: History tells us the second year following a bear market trough is overwhelmingly positive, most often with above average returns. In fact, since 1877—as far back as we can measure—the second 12 months following a trough have always been positive save after the 1932 market bottom, when stocks lost just 0.4% before regaining their stride and climbing higher for the next three years.*


Emerging Markets: This is an important region—or collection of regions, if you will, since emerging nations are flung across six continents. Their aggregate GDP is just over 25% of the global economy. Together, emerging markets are bigger than the US, and just a hair smaller than all of the EU.** And they are growing faster. They have huge swaths of population that continue to get wealthier. Just now, many Emerging Markets nations are moving into average annual per capita income levels commensurate with rapidly increasing consumer goods purchases. And their robust growth should continue to contribute to an increase in global trade.


Rebounding Business Investment: Normally during a recession, business spending declines significantly, even disproportionately to other economic inputs (e.g. consumer spending). When steep declines inevitably reverse, the resulting rebound can be a catalyst for economic growth—and so it is in 2010. Companies lean and exceptionally productive as a result of recessionary cost-cutting will need to restock depleted inventories as demand picks up. And, ripe with high cash balances, companies are primed for future investments. Fueled by significant operating margins, Q4 2009 earnings growth has already been hugely positive, notably so in comparison to last year's depressed fourth quarter results.  


Stock Valuations: Stocks' earnings yields remain well above comparable bond yields, meaning stocks' valuations are still quite attractive. Relative to historical averages, current equity valuations are still very low, leaving plenty of room to rise.


Stimulus Support: Monetary and fiscal stimulus will continue to provide support as the global economy recovers. As of yearend, just under one-third of the allotted US fiscal stimulus funds had been paid out, leaving significant impetus for growth still cooking in the coffers. Over the year ahead, we anticipate the Fed and other central banks will continue to tighten flexible monetary policy—but so far we've seen every indication such steps will be gradual and measured. Additionally, interest rates across the globe still remain at extreme lows—with room to rise before even reaching historic norms.


Prevailing Sentiment Is Skeptical: Especially in recent weeks, negative headlines have dominated, at the exclusion of any underlying positives—a phenomenon we call the pessimism of disbelief. Even positive stories are given a negative spin to fuel the apparent hunger for bad news. But such negative sentiment is typical of a bull markets, and a bullish sign. We expect the market to continue climbing the wall of worry erected from these (often misplaced) fears for the period to come.


These are just a few of the factors driving the bull market ahead. Volatility, like that of recent weeks, is normal—bull markets don't rise in a straight line, and near-term fluctuations, even corrections, are often driven by news stories that quickly gain attention and provide something for doubters to latch on to before eventually fading away. But when negative sentiment reigns supreme—and positive fundamentals are in the fore—it's typically a great time for stocks.


*Source: Thomson Reuters.

**Source: IMF; Thomson Reuters, Consensus Economics. Based on 2008 world GDP figures.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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