Guru Insight: Jim Stack's naked truth about the current bull market
Filed under: Columns, Economy, Investing, Earnings
Investing expert James Stack was one of the first on Wall Street to predict the stock market meltdown and recent bear market. In the late 1990s, the editor of the biweekly newsletter InvesTech Research warned of a high-tech bubble that would spread to other sectors and take down many small investors. More recently, he has left the bear behind and has been making the case that the economy is rebounding for real. Even in the face of dismal corporate earnings, Stack says we have truly turned the corner and that recent stock market gains will not be short lived. In fact, he says they will continue through 2010. We caught up with Stack to discuss why this is the case. He makes an important point: Investors would be wise not to look at corporate earnings to figure out where the stock market is headed. Read on to find out why.
DailyFinance: You make an interesting point in InvesTech Research that most seasoned investors agree that the stock market leads the economy. Yet they somehow jump to the opposite conclusion that corporate earnings should lead stock prices.
Jim Stack: Yes, that is true. But that has seldom been the case -- especially coming out of recession. In fact, there is an average eight-month lag between the end of the recession and when investors start seeing a positive earnings increase.
Why such a lag?
One reason is that any astute corporation will use a recession as an opportunity to increase profit margins and clean up its balance sheet. Unprofitable segments or divisions are shut down. Depreciable assets or amortization will be written off as an expense. The impact on earnings is negative, but it significantly improves the potential profitability coming out of the recession.
And this has been one of the longest recessions in a long time.
Yes, it has been the longest in 76 years, so it's normal to expect a lot of restructuring to have a major impact on corporate earnings. Based on the time period, if the recession ended in June, we shouldn't see the first increase in corporate earnings until the first quarter of 2010, although we expect it by the fourth quarter of this year.
So what is your view on corporate earnings now, as we come out of a long recession?
If you look at operating earnings, instead of reported earnings, which include the recessionary write-offs, the total earnings for the S&P 500 companies are down 43% from their high in 2007. Yet the stock market is up. But sector by sector, the story is very different. Frankly, outside of the banking debacle and boom-to-bust cycle in commodities, we're fairly impressed with the stability in corporate earnings. In fact, some sectors are seeing healthy increases from what were previously "peak earnings" in the second quarter of 2007.
Which sectors showed the strongest increases in earnings?
Consumer staples, health care and utilities have actually seen strong increases in earnings since that pre-recession peak in the second quarter of 2007. Technology and telecom are down only slightly, while consumer discretionary and industrials are off about what might be expected from a severe recession.
In other words, if you look past the boom-to-bust commodity cycle and the financial debacle (which is the focus of the government bailout), then corporate earnings are not as scary as they seem.
But they still look scary by some metrics. If you look at reported earnings, a price-to-earnings ratio of 145 for the S&P 500 appears downright frightening!
But that's far from the whole story. If you look at the alternative of sitting in cash, or in a money market fund or T-bills, then stocks look pretty attractive by comparison. For example, it's pretty easy today to step out there and find healthy companies paying a 3% to 4% dividend yield. One valuation metric that we have used in the past is the ratio of T-bill yields to the S&P 500 Dividend Yield. And by that comparison, one might say that stocks have never looked cheaper.
So what are the lessons, here, for investors?
When looking at valuation arguments from Wall Street pundits or in the media headlines, always remember:
- Earnings never tell us where the stock market is headed... instead, the stock market tells us where earnings will be a year from now.
- Measuring valuation is not black and white... there's always a lot of "gray" involved.
- In many cases -- especially after a recession -- all the hype about earnings and valuations is simply "noise"... the kind of distracting information that keeps you from focusing on what's important.
Do you believe, then, that the current bull market should continue for sometime?
If this bull market is for real, and we believe it is, then it could still be in its early stages. Yes, there are lots of obvious problems and dark clouds overhead, yet that is usually the case in the first year of a new bull market. The first six months to 12 months of a new bull market are always the most disbelieved and unloved. And from the weeks immediately preceding the March 9 low through this scary month of October, there have been more than enough ominous headlines to frighten investors to the sidelines and keep them there.
Coming out of one of the longest bear markets, should we now expect a long bull market?
We believe this will not turn into one of the longer bull markets, or perhaps not even match the average Bull Market Duration of 3.8 years. But I also would say that it would be a rare exception to see this bull market expire before the end of next year. Note that not one bull market in the past 60 years has lasted less than two years.
James Stack is the editor of top-rated, InvesTech Research.
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Reader Comments (Page 1 of 1)
11-14-2009 @ 11:32AM
kevin said...
Actually, he's a little late with his declaration. Others have already sited it.
Reply
11-14-2009 @ 12:30PM
clem said...
ge if I had a job or any savings left after the crooks on wall street looted the american economy. I would stay with the stock market, with all those agencies keeping them honest we know the dow/market will never be manipulated for the gain of the wealthy and big business again. my last two cents won't even by a peace of gum ( gas $ 4.50 market under 8000 in 2010 tell them clem told you))
11-14-2009 @ 1:28PM
John said...
Bull market, how about bullsh-t .20 % unemployed,foreclosures thru the roof,
bankruptcy at all time high.Wall st.and
corporate scum bleeding the middle class
dry. Tim Geitner ,biggest jerk in D.C.
Hard to figure the talking heads out.
Reply
11-14-2009 @ 3:06PM
kluji said...
I think Mr Stack is mistaken. This is not a bull market. It is a Bear Market Rally. Can it last well into 2010, Sure, there is rrom to rally.. Is it a bull market? No.
Reply
11-14-2009 @ 3:07PM
dan said...
If you are talking to the top 1% of the population who own 33% of the wealth, and the rest of us are waiting for the trickle down, then you have a audience of the few.
The casino lives because there has been little movement on regulation and the too big to fail banks have gotten fewer and far between. It's time to break up the monopolies in all the areas of our economy, health insurance, oil, gas, auto, big pharmacy etc.. if we want a truly free enterprise, that's competitive in the world. Example, would be Germany prior to the fall of the Berlin wall and then totally screwed up their economy and East Germany's by allowing mafia capitlism to inject itself, via multinational corporations and local corruption.
The stock market has little to do with main street concerns and the American public knows that.............and is getting restless for some trickle up for small businesses and workers, who are the consumers and have been the drivers in the world's economy, something the wealthy, economists, and paid for politicians seem to forget on the way to the bank to pick up their corporate checks.
Reply
11-14-2009 @ 5:44PM
dpc2224 said...
Don't know about the market, but you can bet state and federal taxes will be going up. One reason is that many government operations have been privatized or deregulated. Now you must add in corporate profit margins even for the basic needs of life. Also, most states must deal with the huge number of UNFUNDED MANDATES and welfare program costs handed down by congress.
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11-14-2009 @ 3:53PM
AL said...
Of course there is a market that the rich are getting richer off of. They certainly want the fools to go out at Christmas and gorge themselves into debt, just so the rich has a cushy life style. The rich in America never earned a dollar themselves, they made it off the backs of hard working Americans that got screwed over by the very government that gave all the tax breaks to the wealthy. Wall Street got away with FRAUD and then got bonus checks to boot. They of course told you that they needed those big checks to retain the talent they have. What talent? A talent to steal, commit FRAUD and get away with it? You betcha. Wake up America, we have a fool in the office of the presidency and the talent he has around him like tax cheat Timmie and Dodd and Frank are perfect examples of idiots.
Reply
11-14-2009 @ 6:54PM
Bubba said...
What are Republicans complaining about?
You wanted deregulation and you got it....and to be expected, received the cheating, greed and fraud that hurt everyone.
You wanted Corporations to leave the US to save tax revenues and they were allowed to do so. But by doing so, they also cut their employment ranks and the fair revenues that should have gone into the system have been used instead to pay the huge CEO bonuses.
You have for years encouraged Unions to be busted and now Middle Class American Workers must contend with smaller wages and therefore smaller spending capabilities.
You insisted that the dollar be weaker and W carried out that plan. Now the US dollar is so weak, our National debt overseas is gargantuan. You wanted to Nation build in Iraq regardless of their factual responsibility with 911 and you even allow W to not include War $$$$ into his budgets. But the costs became astronomical and with the Private Blackwater Mercenaries hired to do US dirty work, beside selling out our Nation, you've indebted our children and grandchildren. Now, the best to have to offer the American People after all the lies, deceit, divisiveness, contempt, ineptitude, arrogance, gloom, doom, fear and incompetence is "I hope Obama fails." Well, it's the Republicans who failed the tests of integrity, dignity and honor and it is the Democrats who reaped the rewards for your treachery to Our Nation and Our People. It's time for some of that $$$ to be returned to the American People and it may very well be through the Health Care Bill that that will happen. Health Care, something else that the GOP has dug in and refused to the American People even though now suddenly, Medicare is worshiped by your delusional constituents. You just can't fix stupid!
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11-14-2009 @ 5:05PM
Jinmbo said...
Jim Stack is full of bull. He is way wrong. It is not getting better. It cannot because of the falling dollar, off shoring of US jobs, corrupt financial system, a do nothing congress, corporate greed that prefers short term gains and selling out our nation, bizarre debt to communist China (and watch what they do with it), etc...
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