One year ago this week, on March 9, 2009, the Standard & Poor’s 500 hit a 12-year low of 672.88 as it reached its lowest point during the most recent economic recession. Since that time, the S&P 500 is up 69%. The Dow Jones Industrial Average and the NASDAQ, of course, witnessed a similarly resilient rebound. Black Enterprise called on a handful of financial experts to find out why the market has bounced back so powerfully, whether the rally can continue, and how investors should proceed in the coming year.
Wayne P. Weddington III, portfolio manager and managing partner at Brunswick Capital Partners. Author of Do-it-Yourself Hedge Funds (Hachette; $24.99).
The reason for the rally:
I think a lot of the market activity in the last 12 months has been speculation. We’ve also had a tremendous collapse in market fundamentals. I am personally one of the people that think it is overshot. There is a lot of uncertainty in the market. We have a lot of exogenous activity.
The word on the street [is] that people have really been trading technicals because the fundamentals haven’t really taken strong direction. [This means people are buying] more in terms of price action. If you are a speculative investor, the market rallies and you want to participate and it becomes a self feeding proposition. No one wants to be [the one who didn’t get in on the market action].
Predictions for the coming year:
The Fed … knows interest rates will increase. They are walking a very delicate line. Rates will continue to inch up slowly as they get evidence that the economy is [improving] I think what they did do was truly avert a [crisis].
Advice to investors:
Buy on a sector basis. Some of them make fundamental sense. Capital goods will continue to perform. Technology will continue to market perform or better because even in difficult economic times people still want their iPods. Consumer noncyclicals will continue to perform. It has been a standout at about 22%. To short the market against it would be a profitable trade.
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Eugene Profit, CEO of Profit Investment Management in Silver Spring, Maryland
The reason for the rally:
There was a lot of pent up demand because stocks had gone down so much, and I don’t think anyone thought that we would see a [more than] 60% rebound off the bottom. From my vantage point, you can’t really point to one thing or another [other] than just low interest rates and investors wanting to own stock for the potential of high returns. It developed its own momentum. A lot of the investors kind of looked at all of the data with more of a positive eye than more of a jaundiced eye.
Predictions for the coming year:
Looking at a little bit of the improvement in earnings calls that have come forward, the economy has gotten a little bit better. I think right now it looks like you may see [the market move]
another 10-15% higher from here. That being said, in the short term there are a lot of reasons to think that maybe we came too far too fast and you might see some investors heading for the exits and taking a wait and see attitude. Investors are becoming a little bit leery and you’re starting to hear the commentary that this run up in stock prices isn’t supported across the board in terms of what you saw with corporate profits.We still have some issues where the economy hasn’t completely rebounded–not even close. Unemployment is still way too high. Demand still hasn’t picked up in a lot of different areas. The fed has discussed pulling some liquidity out of the system and buying the debt instruments that have been used to support interest rates staying very low. A big rise in interest rates is going to choke off stock market gains and also impede economic growth. But this being an election year I don’t think you’re going to see any of that.
Advice to investors:
[Considering the low interest rates, the deficits, and that] unemployment is still very high, when you put all of that together it is all the more incredible that the markets had this big of a run since the March lows of last year. That is why you have to be in [the market]. It doesn’t work in any direct pattern where you can point and say if X happens Y will happen. You really do have to stick to your investment discipline and really buy in all markets and sell in all markets.
Douglas Coe, chief investment strategist and managing partner of investment banking and capital markets at Moody Reid Financial Advisors in Kansas City
The reason for the rally:
I believe president Obama is reining over one of the biggest stock market rebounds in American history. I’ve been on Wall Street over 18 years. This is one of the biggest bull markets I’ve seen. I don’t think it has dawned on anybody yet but if you bought in right after he was sworn in you made a killing.
The market rallied back because… people tend to move when they invest in a herd like mentality. There were a lot of uncertainties heading into 2009 that people were just not clear of the direction on key economic fundamentals of the United States and the global economy. Once we saw [there was] a transition of power…[and that]… President Obama, was very capable and understood the surrounding economic factors that needed to be addressed, the market exuded a lot of confidence. [We knew] that although the short term would be choppy, the long term prospects for the country and the world looked great.
Predictions for the coming year:
I believe [the rally] will continue because no one expects it too. I’m very bullish and very noticing of healthcare. I just simply believe that no matter what side of the aisle you’re on we’re going to do something fundamental…to address this healthcare issue. I don’t know if everyone can agree to all the aspects of it, but one thing you know is that people… will need healthcare, food, clothing, and shelter.
If you are looking at a longer term view, it is a really good time to look at the housing situation. I don’t believe in 10 years you will be able to buy real estate and land this cheap again. You tell me with a growing population people aren’t going to need housing in 2030.
Advice to investors:
One of the things you have to really resist doing: don’t be so day to day. Take a step back. Look at the long term. A lot of times we get hung up looking at the share price day in and day out. That is not how you make real money. The greatest times to invest are when things look the worst.
You have to now more than ever diversify. Use dollar cost averaging over time. You inherently buy more when prices are less and less when prices are high. That’s the key. Don’t look at it this week, next week or next month. You have to be forward thinking, but most importantly you have to be forward doing. The winners over the next years will be those that see tomorrow, today.
What are your feelings about rebounding economy? CLICK HERE to take the Black Entrprise poll.