Despite rising unemployment and a stagnant real estate market, there are increasing signs that the stock market has begun a solid bull run, according to two prominent Milwaukee-area financial analysts. They are encouraging their clients, whether institutional investors or high net worth individuals, to put their assets back into the stock market.
In its October newsletter, Milwaukee-based Sadoff Investment Management Inc. writes:
“While we have spent much of the past two years not invested in stocks, in the recent months several indicators have been triggered that have told us to get back in the market. These signals show that we are towards the early (not late) stage of a new bull market.”
The stock market bottomed out this March, said Michael Sadoff, an investment advisor with the firm, and began showing signs of a significant surge in March and again in July, when the New York Stock Exchange’s advance decline rate exceeds a 2:1 ratio.
“This has only happened 12 times over the last 50 years and in each of those times, the market has been up over the next six months to year, and up nicely often,” Sadoff said. “The technicals (we’re seeing) have nothing to do with the economy, but are telling us to get back in (to the market).”
Clare Zempel, principal with Zempel Strategic, a Fox Point-based an economic and financial analysis consultant to corporations, institutional investors and high net worth individuals is also bullish on the market.
“The strategic investment implication is that investors should raise their portfolio allocations to common stocks to their maximum comfort levels,” he wrote in Zempel’s October newsletter. “The tactical investment implication is that investors should consider market declines or ‘corrections’ to be ‘buying opportunities.'”
The market is now also showing several fundamental signs of bullishness, Sadoff said. Those include low interest rates, the appetite for Treasury bonds by some large banks, and the ability of banks like Wells Fargo to repay loans from the federal Troubled Asset Relief Program (TARP).
“The banks are in a fairly nice position now, with a steep yield curve ahead of them, regardless of what is behind them,” Sadoff said. “The economy is slowly turning around. Companies have cut fairly close to the bone, so when they get an uptick it will fall to the bottom line.”
The stock surge in value, which began in July, is likely to mellow in the coming weeks or months, Sadoff said.
“The first third of a bull run is the surge (which we are in now),” Sadoff said. “The next two thirds are the normal growth rate. I think there is still room to grow, but the market can’t continue to go up at the 50 percent tick it has.”
The emerging bull market is likely to last for several years, Sadoff said, but investors should be watching for pitfalls that could derail it.
“One of the signs I would watch for is commodity prices, especially if they start to plummet,” he said. “If we were to see a pullback (in stock prices) and commodities plunging, then maybe this is not a new bull market. But as long as we see only a moderate (price) correction, and as long as commodities don’t plummet, this bull market will still be in place.”
Even though unemployment continues to climb and many investors remain pessimistic about economic recovery, Zempel said historic indicators are pointing toward the end of the recession and the beginnings of bull market conditions.
“It is not unusual for the unemployment rate to peak after the recession’s end,” he said. “And it is usual for the stock market to rise before recoveries take hold and the unemployment rate declines. Investors who wait to raise their allocations to common stocks until after the unemployment rate has dropped tend to miss sharp rebounds in stock prices.”
