Dorfman: Invest For The 2nd Stage Of The Bull Market

From Jan. 19 through Feb. 4, the Standard & Poor’s 500 Index, a decent gauge of the overall U.S. stock market, dropped about 8 percent.

Among the reasons sparking the decline were President Barack Obama’s proposed tax on banks and a congressional deadlock on health-care legislation.  Some stock-market pundits take the drop as a sign that the stock surge that began March 9, 2009, is over, or almost over.

I believe the rally will continue.  The recent slump, in my view, was normal.  The U.S. stock market historically has averaged at least three declines a year of 5 percent or more, and one fall of 10 percent or more, according to Ned Davis Research Inc.  I think the rally will resume and run — with unpleasant interruptions, to be sure — through most of 2010, and possibly longer.

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Evidence of Recovery

Look at the fourth-quarter tally of the gross domestic product.  It rose at a 5.7 percent annualized pace, the strongest reading since the third quarter of 2003.

Or consider the Conference Board’s index of leading economic indicators.  It has risen nine months in a row, from April through December.

Auto sales are gaining, home prices have firmed in many cities, and technology orders are improving.  All in all, the evidence points to an enduring recovery, in my view.

If the economy is indeed recovering, it would be shocking for the stock market’s advance to stop abruptly.  There has been a historical pattern, and the market seems to be following it.  A terrible event such as a major terrorist act could, of course, cause markets to abruptly change direction.

Second-Stage Bull

During most bull markets, the first 40 percent or so of stock market gains occur in a spurt before an economic recovery begins.  This time, that would be the period from March through, say, September.

The remaining 60 percent of the gains usually occur more gradually and haltingly during the next year or two, as the economic recovery unfolds.

– “Buy Stocks Now To Ride Second Stage of Bull Market”, John Dorfman, Bloomberg, February 8