After 12 years of volatility and disappointment, stocks might be starting the next leg up. And the widespread fear and distrust might only fuel the rally more. As some major market indexes have moved closer to their all-time highs, several market gurus are starting to think the unthinkable: We may be entering a new secular bull market.
That's a bull market that could take the averages much, much higher over several years. Think 1982 to 2000. It would mean a definitive end to the secular bear market that has haunted us since 2000, producing a "lost decade" and maybe a lost generation of investors.
And if you're shaking your heads in disbelief, that only clinches it for these bulls: Your doubt and downright hostility toward stocks is building a wall of worry like the chamber of molten rock and magma that grows and grows before a volcano explodes.
Two of the three I spoke with- Mark Arbeter of Standard & Poor's Capital IQ and Craig Johnson of Piper Jaffray- are technicians. The third, Jim Paulsen of Wells Capital Management, is a fundamentally oriented bull of long standing. But they all believe we could be on the verge of a major move higher. "The technical conditions are ripe for the end to the secular bear and a new secular bull emerging," Arbeter told me. "This is not a one-year or two-year run. This is a multiple-year run," said Johnson, who thinks stocks are poised to hit all-time highs soon.
"I think it's going to be a multiyear recovery," agreed Paulsen. Why? Because the fundamentals are better than most people believe. "I think the great bulk of this move has been about fundamentals rather than the [Federal Reserve]," he told me. "I think the economy has begun to re-accelerate." He reeled off stat after stat to back that up:
this year, unemployment has declined at the fastest rate since the recovery began
individuals are re-entering the labor force in ever greater numbers
consumer confidence has hit a five-year high
automobile sales are surging
housing is beginning to recover
bank lending is picking up
"In many ways, the U.S. recovery is gearing on more cylinders than ever," Paulsen wrote recently. "Its character today is far more mature, more broadly based, and therefore far less vulnerable to external shocks than at any time since the recession ended."
He also said the current stock-market rally, which began in March 2009 and has taken the S&P 500 120% higher, is the "best-performing stock market recovery cycle of the entire postwar era"- and yet at around 14 times 2012 estimated earnings, the S&P 500 is still relatively cheap.
"If inflation stays moderate, we'll move to a valuation in the upper teens," Paulsen told me. Given 4% to 5% average annual earnings growth for the next five years, 18 times $125 a share would put the S&P above 2,000 within five years. He's looking for it to hit 1,500 this year.
Arbeter and Jackson also see the S&P reaching new highs soon-as some small- and mid-cap indexes already have done. "I think the market is telling us the fundamentals are going to get better over the next couple of years," Arbeter told me.
He's particularly pleased the S&P broke through 1440, and "there's not a lot of chart resistance [above that]," he said. "I think we can get near or top the old highs in the first quarter of 2013." That would take us to 1,565, and he believes the market could get to 1,800 to 2,000 over the next couple of years. So does Craig Johnson of Piper Jaffray, who cites poor investor sentiment as a big reason. "We've been 12 years in a secular bear market," he told me. "Right now, the psychology of this market is so depressed. People can't engage."
Indeed, investors have plowed over $1 trillion into bond mutual funds over the past five years, and yanked $500 billion out of U.S. stock funds during the same period. People distrust the market and despise stocks. "This is the most hated or unloved rally I can remember. The sentiment conditions are ready for a much bigger move than many people expect," Arbeter agreed.
What could be the spark? People getting tired of earning nothing from Treasuries or money market funds, forcing them to take more risk and move into equities (which is what Fed chairman Ben Bernanke wants.) "The other big thing that can really get equities moving is that people sense a danger in the bond market and there will be a transfer into equities," said Johnson.
Paulsen worries that the Fed's new "shock and awe" policies may be overkill, raising the specter of inflation, the ultimate rally killer. And he's looking for a nice correction as the market approaches its previous all-time highs. Also, next year's second quarter is historically one of the weakest in the four-year presidential cycle. With the fiscal cliff looming and war clouds gathering in the Persian Gulf, stocks could indeed face a short-term sell-off.
But if these three are right- and I'm keeping a moderate stock allocation on the chance they are- a short-term sell-off is all we'll see. Market, that master of surprises, could be getting ready to fool us again.