Optimistic on US Stock Market

One of my favorite gurus is Richard Bernstein, formerly of Merrill Lynch, now out on his own.  He’s always been a very “reasonable” person, with some very “common-sense” elements to examine markets. He was featured in a great article I’ll summarize below (click HERE for full article).

One belief I share with him is – “it’s all relative.” Markets don’t move on absolutes, but on how things are versus expectations – did we exceed or fall short of what was expected. The stock market is up over the last 12 months because things in the economy were “better than expected” – that’s it!

Four phases of bull markets. Bernstein believes that bull markets go through four phases:

• Denial, when investors say “it can’t happen.”
• Acceptance, when they come to realize that “maybe this is really happening” and start to believe they should have more in the market.
• A “brave new world” of outperformance that will never end.
• A bear market that brings the bull market ends to an end.

He believes, as do I, that US equities are somewhere between phases one and two – between denial and acceptance.

Other Positives

Normal Recovery.  Bernstein believes the recovery in the US is “much more normal” than most believe. The economy is almost exactly tracing out the path of the GDP during the recovery from the last two recessions – in 1990 and 2001. In fact, he said, the 2001 recovery was weaker than the current one.

Strong Profits.  Few are aware, according to Bernstein, that 70% of US companies are now reporting positive earnings surprises. Cost-cutting doesn’t explain this, he said, because 54% of those companies are reporting positive revenue surprises.

Rising rates Normal.  Bernstein largely dismissed concerns that rising interest rates would dampen the recovery. He said we are entering the middle phase of the economic cycle (not to be confused with the phases of bull markets). US production is increasing, he said, as is capacity utilization. It is normal for long-term interest rates to move up at that time.

Leading Indicators Positive.  Bernstein looks at 15 leading indicators of the US economy, and he said “every single one is both very strong and getting stronger, or medium and getting stronger.” That statement goes to the root of Bernstein’s optimism.

As all gurus must, he does have a word caution, however, that his biggest fear – and the one factor that could derail his forecast – would be gasoline prices rising disproportionately to wages and salaries.