The great investor John Templeton once said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”
I’m sure you remember the gut-wrenching spectacle in the markets during the fall of 2008…
The bull market of the last five years was born of abject despair. Workers were moaning that they would have to work through retirement. Defenestration was a “thing.” Houses and jobs were lost by the hundreds of thousands per month.
Over the next year, the S&P 500 tacked on 500 points and went on to more than double in five years.
All the while, equities have been climbing a wall of worry. Skeptics were legion. Even now, one-third of all investors think there will be a correction soon.
Right now, we are in the later phase of skepticism — or the beginning stage of optimism.
There is no sense that this market is in the euphoric phase. No one is saying it’s different this time (with the possible exception of Bitcoin buyers).
This would portend we have some upside remaining. Retail investors agree…
Cash Flow is Back
Ma and pa investors are returning to the market after having been burnt twice in the last 13 years.
Investors poured more money into stock funds in January than any other month in history. The first quarter saw the biggest inflow since 2004.
According to the New York Times:
The $65.5 billion of net investment in equity mutual funds and exchange-traded funds that month appeared to give the market fresh momentum, culminating in a first-quarter gain of 10 percent for the Standard & Poor’s 500-stock index. That benchmark ended the quarter at a record high, topping the previous peak of October 2007.
Perhaps this is the dumb money coming back in after a remarkable five-year run…
But there are also fundamental reasons to buy stocks, the first of which is that you aren’t getting a return from owning bonds.
The second is that earnings from companies in the S&P 500 are hitting records.
EPS for those 500 companies reached $96.83 in 2012. The street predicts EPS will hit $111.14 for 2013. That’s solid growth.
Good News Bulls
What we are seeing now is a situation where good economic news — like housing prices — pushes stocks higher, and bad economic news — like jobless claims — doesn’t take it down to the extent you would think.
In other words, investors are buying the dips and buying the news.
Going forward, I see value in old-school tech stocks like Microsoft, Intel, and Qualcomm.
We are also going to continue to ride the ever-expanding sector of natural gas infrastructure. This has been a steady and true cash cow for the past two years.
I recommend using silver as a currency hedge. And I’m also betting on special situation stocks that will benefit from the legalization of online gambling in some states in the U.S.
All the best,