Stock markets worldwide have been rallying for nearly two years now. The Standard & Poor’s 500 Index hit a low of 676 on March 9, 2009 and has risen ever since. In late February it was in the 1330 range. Yet the average investor doesn’t seem to trust the trend, and plenty of professionals are skeptical as well. Worries over the growth in U.S debt, cynicism over the Federal Reserve’s stimulus strategy, and talk of a short-term cyclical bull market within a long-term secular bear market abound.
Yet two of the most eminent historians of Wall Street are saying that not only does this bull market have a long way to go, but that it could be as historic as the market’s rise from the early 1980s through the late 1990s. Jeremy Siegel, the Wharton School professor and author of “Stocks for the Long Run,” has studied stock market returns going back to 1802. He says this market is at least 20 percent below the long-term trend line in stocks. Other bull markets have risen well above the long term trend line before they were over, he says. “This market is not overvalued,” he recently told Investment News. “The next several years are going to be good for stocks.”
The 2008 bear market pushed the U.S. stock market to almost 40 percent below its trend line. That was the fifth-largest decline since 1865, he said. Such large declines in the past have been followed by strong, multi-year recoveries. “In 2008, people were telling me that this feels like the 1950s,” he said. “But I told them don’t lose the faith. Stocks are going to come back.” Strong growth in corporate earnings will propel stocks higher for several years, he argues. The current estimates for earnings on the S&P 500 say they will surpass the record set in 2007, when the index hit its peak of 1565. Siegel says his analysis indicates the S&P could hit 1800 in the next two years.
Long-time market commentator Laszlo Birinyi has predicted the market could double by late 2013. Birinyi, a long-time guest on the old Wall Street Week with Louis Rukeyser show, expects the S&P to rise by 60 percent to as much as over 100 percent in the next few years. Birinyi says his study of past bull markets shows that they go through four phases:
- An initial spurt, when investors remain reluctant to admit a bull market has begun.
- A consolidation phase, when returns are anemic.
- An acceptance phase, when investors start believing and returns begin to improve.
- Finally, an exuberant phase, with strong returns.
He was impressed by the strong 80 percent gain in the first phase of this cycle, and says past bull markets that started out this strong were among the best for investors. For instance, the bull market that began in 1982 started off with a 63 percent return, he said. By the end of the cycle, stocks had gained 229 percent.
In the end, predictions are educated guesses. Investors should concentrate on sticking with stocks no matter what the short term outlook.
