It's time to recognize the revitalized action in US stocks for what it is fast becoming -- a new bull market.
Plenty of skeptics will say I am jumping the gun. At a price-earnings ratio of 32 to 1 for the Standard & Poor's 500 Index, the market looks too overvalued to be starting a sustainable recovery.
The problems that led to the slide of the past three years are a long way from solved, including the threat of economic deflation depressing prices, profits and employment.
Well, since when did markets wait for a turn of events to be confirmed by hard evidence before taking it into account? If what we see now can't yet be officially stamped a new bull market, it will serve until the real thing comes along.
From its low on Oct. 9 through yesterday, the Wilshire 5000 Index of all actively traded stocks based in this country climbed 2,210 points, or 30 percent. If we use the index as a gauge of market value, US$2.21 trillion was added to the wealth of stock investors.
Room for gains
True, that's only a fraction of the US$7.41 trillion erased from investors' net worth between March 2000 and October last year. In percentage terms, though, it matches up with the index's 31.6 percent gain in the first eight months of the recovery from the last bear market, in 1990.
Over an eight-month span after the market bottom following Black Monday of 1987, the popular averages posted gains of between 20 percent and 25 percent.
When we say a new bull market is dawning, does that mean that stocks will encounter nothing but clear sailing ahead? Of course not. Each bull market takes a different form in both length and strength.
To find a precedent of a relatively short-lived bull that gave way to renewed troubles, we need look no further back than the early 1970s. Coming out of a 30 percent decline between December 1968 and May 1970, the S&P 500 rose 80 percent into early 1973, according to my Bloomberg.
Then it plunged again by more than 40 percent over the next 22 months. The 1973-74 bear market took the market lower than it had been during the lackluster 1969-70 period.
No set definition
Defining bear and bull markets has limited predictive value, at best. So why bother? For one thing, stocks are a sensitive, if imprecise, barometer of conditions in the broader economy.
The market's recent behavior can be interpreted as evidence that the dislocations caused by the Internet boom and bust are starting to correct themselves.
The median forecast of economists surveyed by Bloomberg looks for economic growth in this country to step up from 2 percent in the soon-to-be-concluded second quarter to 3.2 percent in the third quarter; 3.5 percent in the fourth quarter and the first quarter of next year, and 3.7 percent by next year at this time.
If the forecasts err, maybe it is on the cautious side.
Too pollyannish for you? Stocks' recent gains can also be viewed more warily as a sign of new speculative energy building up in the market - enormous amounts of "liquidity" looking for a place to go.
The fed
"Over the last few months or so, the Federal Reserve has been communicating loud and clear with the markets," says Greg Jensen, an analyst at Bridgewater Associates in Wilton, Connecticut. "The Fed wants long rates down. Bond yields have continued to fall in the face of seemingly improving economic and market conditions." The intent, by all accounts, is to prevent a serious spell of deflation -- and a worthy purpose that is. In the pursuit of that objective, it isn't very hard to imagine the Fed's stimulative policy encouraging renewed inflation in stock prices.
During the stock bear market, we have seen impressive, even scary, money flows into some types of real estate and bonds, including a rush of money since last winter into junk-bond mutual funds.
Though short-term interest rates have been cut to near- negligible levels, US$2.18 trillion still sits in money-market mutual funds, US$1 trillion of that in retail funds held by individual savers and investors.
If it didn't take strong growth conditions to pump up real estate and the junk-bond markets, the stock market could be next.
Even a moderate recovery in economic activity might be all that is needed to put a new jolt in stocks.
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