4 Reasons to Believe in the Bull Market

4 Reasons to Believe in the Bull Market

iStockphoto/The Fiscal Times

“Be a bull, be a bull. The whole world loves a bull…”

Cole Porter may be spinning in his grave in response to the violent assault on his 1948 ditty, but the lyrics and upbeat melody do chime with the views of a growing array of investors.

The S&P 500 finished Friday at a second consecutive record high, and major indices have now posted gains for four straight weeks. To be sure, the earnings announced Thursday by technology sector heavyweights Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) were disappointing, but analysts had predicted that tech companies were likely to deliver the weakest crop of earnings from amongst the ten S&P 500 sectors; the only question was just how weak they would turn out to be.

In spite of the anemic performance on the part of those technology stocks, investors and market pundits are finding plenty of reasons to celebrate and be bullish. The stock market swoon that Federal Reserve Chairman Ben Bernanke triggered when he began discussing tapering off the Fed’s support for bond markets now seems to have run its course. Since its revival, and as of Friday’s close, the S&P 500 has finished 11 of the last 12 trading sessions in positive territory, leaving the index up 18.64 percent for the year so far, and giving investors a total return (including dividends) of about 20 percent, according to calculations by Howard Silverblatt of S&P Dow Jones Indices.

So, why should you be a bull? Herewith, some views from those who already have ensconced themselves in the bullish camp.

Interest Rates: In his most recent pronouncements, Ben Bernanke has taken tremendous pains to inject some calm into financial markets, reassuring investors that he and his fellow policymakers aren’t going to suddenly reverse course and start boosting short-term lending rates. The result? The market has suddenly recalled that it’s a good idea to listen to the Fed, and given that Bernanke just addressed Congress this week, there’s plenty to digest, much of it aimed at reassuring the markets.
“As long as we do not see a significant increase in yields, stock markets can continue to advance,” Russ Koesterich, global chief investment strategist at BlackRock, told clients in a note published at the beginning of the week. The reason for this is fairly straightforward: As long as earnings continue to increase while bond yields linger near historic lows, the risk/return tradeoff favors stocks.

Fund Flows: Investors have been eager to chase the market higher, adding to their stock holdings as indices have climbed. (Data from Lipper suggests that in the first half of July, equity mutual funds saw a net inflow of some $30 billion, about the same as was recorded throughout the whole month of May, the last month for which Lipper has reported official data.)

Money flows like that are one of the biggest reasons the analytical team at Birinyi Associates remains upbeat about stocks. “Despite all the vicissitudes, gyrations and issues,” they note in a report this week, “we have not seen any selling into strength.” In other words, investors don’t appear to have been made nervous or anxious by the string of new highs recorded by major stock indices over the course of 2013, seizing on them as an excuse to lighten up their exposure to stocks.

Financial Stocks Providing Leadership: The folks at Birinyi also note that their studies of market cycles suggest that whenever financial stocks do well early on in a bull market, that bull tends to last a lot longer. “Given the early strength of banks, brokers and others, we contended that this was to be a memorable bull market and we continue (to be) of that belief,” they write.

Certainly, the financial stocks are on target to deliver some deeply impressive earnings results: While Thomson Reuters calculates, based on analysts’ forecasts, that the S&P 500 as a whole will post earnings growth of only 2.9 percent for the second quarter of 2013, the financials stocks in the index are likely to record growth of 24.4 percent, with 80 percent of those that have reported thus far posting positive surprises.

Valuations: In spite of the awe-inspiring market returns, the valuation of the S&P 500 index isn’t all that exorbitant. It currently trades at about 19.5 times trailing 12-month earnings, which certainly is higher than the 15.2 multiple it commanded at this time last year. But adjusted for prospective earnings, the multiple is still less than 15, and the median is 14.5, meaning that at least half of the stocks in the S&P 500 trade at that level or lower. Add to that the fact that corporate balance sheets are in impressive shape, by and large (no Detroit-scale bankruptcies looming large on the horizon), and the observation that some former trouble zones, like Best Buy (NYSE: BBY) and Netflix (NASDAQ: NFLX), have pulled off some impressive turnarounds. It all adds up to a solid fundamental picture: perhaps not explosive growth, but few landmines waiting for unwary investors to step on.

Of course, even the bulls acknowledge that there will be areas of weakness, and as the results of Google, Microsoft and other technology companies show, earnings for companies in that group are likely to prove underwhelming. Even so, Stuart Freeman, chief equity strategist at Wells Fargo Advisors, suggests overweighting tech stocks, arguing that not only are their valuations low (having been declining for 13 years) but that their prospects are likely to improve as the economy moves into the later stages of a recovery and corporations ramp up their spending and invest in upgrading their technology.

And given that a majority of data points – from economic news to earnings releases – suggest a strengthening economy, the market’s default mood is likely to remain bullish. That doesn’t mean that you have carte blanche to behave recklessly, but it does mean that you might want to relax and enjoy the party, for as long as it lasts.