Market Outlook: The Bull and Bear Cases

by: Faisal Laljee

So what are you? A bear? Or a Bull? Of course, if you are a smart investor like Warren Buffet, George Sorros or Carl Icahn, you don't pick a side. You just buy good stocks and hold them for the long term.

Bull Case
  • Wall Street Journal had an interesting front page article on Tuesday titled "Why Market Optimists Say This Bull Has Legs". The primary reason given is the strength of the global economy today over the past when bull markets were shorter. Indeed it is true that investors have access to global markets today, whether it be in the form of private investments, ETFs, ADRs or hedge funds. Such easy access was not around 10 years ago. In fact, most investors back then thought China was something stored in buffet tables. India was tough to even locate on a map for most people. Now, these markets present the fastest growing economies in the world.
  • On Tuesday, Jim Cramer predicted the Dow to rise another 1000 points before year end. That is a total annual gain of 16% on the heels of a 16% gain last year.
  • All this when the frenzy of M&A activity is at all time highs with a deal announced 1 almost every 3 days this year. Now that gold, real estate and bonds are no longer the areas of double-digit gains, investors are plowing money into the financial markets.
  • At the same time, according to the people that frequent CNBC shows all day, individual investors are not heavily invested in the market. In fact, a lot of retail investors are on the sidelines, waiting to get it, which makes any pull back, a short-term one that lacks depth.
  • Statistics thrown around in the media state that there is hardly ever a time when the broader US markets decline in the 3rd year of a presidency.
  • Interest rate and unemployment are still at historic lows, while inflation is under control.
Bear Case
  • Bull markets typically last 4 years. This one is in its 5th year (or nearing the end of the 4th year depending on when you think the bull market began).
  • Meanwhile, addressing a meeting in Madrid via teleconference, Alan Greenspan said yesterday that the recent boom in Chinese stocks could not last. "It is clearly unsustainable," he said "There's going to be a dramatic contraction at some point." While his object of affliction is China stocks, a decline in China markets has a significant impact on US equities, as evidenced by the 4% drop in DJIA and S&P 500 on Feb 27th.
  • The Dow is up 27% in less than 18 months. A correction is long overdue.
  • Consumer spending is slowing and debt levels are at all time highs.
  • Interest rates have bottomed and are on the way up.
  • Mortgage default rates are rising and the effect of this could spill over to other aspects of consumer wealth.
  • National budget deficit is high (although the bulls argue that it is lower as a percentage of GDP than in the past).
  • The US is engaged in 2 wars that don't seem to end.
  • Oil is near all time highs, natural gas is near $8 and demand will probably drive these prices higher.