Happy first birthday, baby bull market!
The bull market that began last March is now one year old. It came after the worst market collapse in seventy years and its rise of almost 70% has not erased those scars. While some commentators maintain that this rally is only a mere interruption in a very long term bear market, both market history and the developing signs of a recovering global economy point to a continuing bull market.
Its extent and duration as well as the favored market sectors are unknown but past performance gives some guidance as to the probabilities of investment success. Simply reaching is first birthday is encouraging in itself. Since WWII, all bull markets that got this far continued for at least two years with the shortest 26 months in 1966. A sustained bull market accompanied by an improving economy is a rising barometer.
Much of this positive momentum depends on investor moods, which an unexpected tragic event can always reverse. Growth is also dragging the anchors of widespread unemployment but, even in this always-lagging indicator, there are sparks of positive news. The odds favor a second year of rising stock prices, possibly more than current pessimism would suggest.
The first year of the rally saw smaller company stocks do better than their bigger cousins as they bounced back from excessive selling. ING Global Real Estate (IGR-$7) was among our more aggressive recommendations that doubled over the past twelve months. Such performance is now less likely but IGR is still selling at a discount from asset value while yielding over 7%,
Market history favors higher-quality companies in the second recovery year, especially technology, financials, consumer discretionary, and industrials. Newsletters promoting sector funds may make their use tempting but ETF performance tends to sink to the level of the weakest players, like doubles in tennis. The overall market should receive a boost next year as we enter the third year of the four-year Presidential election cycle, often a strong market year.
Medical stocks may have to wait for then. Among financials, Goldman Sachs (GS-$169) stands out. Stocks in insurance companies are recovering from the vicissitudes that infected their investment portfolios. Aflac (AFL-$51) continues to make steady earnings progress while paying a 2.2% dividend yield. With short-term interest rates still at historically low levels, Aflac is a poster child for the well capitalized companies that provide respectable income for investors along with reasonably valued prospects for sharing in growth of the company. Manulife MFC-$20) is another, paying 2.6%.
Recent earnings reports from the bigger technology companies indicated increased spending by businesses on software and new equipment. With earnings reports for the current quarter due to move from rumor to reality in a few weeks, that should build further price momentum for Intel (INTC-$21), Cisco (CSCO-$26), Oracle (ORCL-$25), NetApp (NTAP-$33) and Akami (AKAM-$30).
The more technologically oriented industrials should do quite well. Sigma-Aldrich (SIAL-$52) is a new buy. This St. Louis-based company develops, produces and distributes a broad range of chemical, scientific and biochemical products and equipment all over the world. Sales are $2.1 billion, growing at almost 10% as are earnings. Valuation is reasonable and debt is modest.
Growing global demand supports energy stocks in their usual quasi-independent cycles. Gold, the traditional inflation hedge, is quiescent while inflation is resting. Newsletters will promote smaller gold companies by but I suggest investors stick with Goldcorp (GG-$40), a substantial and profitable gold mining company that even pays a dividend.
There are no sure things in this business but the probabilities favor the bulls. Happy first birthday, baby bull market.