Pros See More Life in Bull Market
Saturday February 19, 1:33 pm ET
By Meg Richards, AP Business Writer
Skepticism Reigns, but Professionals Say Put Trepidation Aside, There's More Life in Bull Market
NEW YORK (AP) -- Any investors who read their January financial statements might be feeling a little too shell-shocked to go back into the market. Put your trepidation aside, professional investors say, because there are plenty of reasons to be buying.
While stocks have recovered somewhat from their poor performance last month, the Standard & Poor's 500 remains stubbornly negative for the year, leaving investors with little motivation to buy. And while money is making its way back into stocks -- TrimTabs Investment Research estimates $7.5 billion has flowed into domestic equity funds since Jan. 27, compared to outflows up to that point -- the lack of enthusiasm for equities is palpable.
Amid the gloom that's hanging over the market, however, a quiet bullishness prevails among professional investors, who point to a robust economy, relatively low interest rates, tame inflation, strong corporate profits and positive earnings growth.
In a quarterly letter sent to shareholders earlier this month, Bill Miller, portfolio manager of the highly regarded Legg Mason Value Trust (LMVTX) said he's quite optimistic about 2005. After a 29 percent increase in the S&P 500 in 2003 and an almost 11 percent increase in 2004, companies are still setting records in terms of profits, cash flow, returns on equity and levels of cash as a percentage of assets, Miller said, yet skepticism reigns.
"I have seen investors more bearish than they are now, but I have never seen more angst amidst such opportunity as there is today," Miller wrote. "Valuations are not demanding, especially in a world of low inflation and low nominal interest rates. Mergers and acquisitions should boom this year, providing windfalls for the shareholders of takeover targets."
Moreover, Miller said, "I would expect corporate share buybacks to accelerate and dividend growth to remain strong. High returns on equity and low nominal growth means lots of excess cash is available to be used for shareholders' benefit."
Failing to take advantage of such opportunities because of a sense of foreboding or a fear of loss would be a great mistake, argues Miller, a widely respected value investor who has earned a reputation for his market savvy -- he's outperformed the S&P 500 for 14 straight years, a feat unmatched by any other mutual fund manager. But he's far from alone in his belief that opportunities abound in equities.
"The bull market is in its fourth year, but it can go on a lot longer. The trends and the economy and the market are still positive," said Alfred E. Goldman, chief market strategist with A.G. Edwards & Sons Inc. in St. Louis, who is forecasting returns of up to 8 percent this year. "And there are a lot of bears around. That's bullish. The reason investors should think about being a buyer is that the economy remains healthy."
Yet the market remains persistently glum. Many investors remain fixated on January's dismal performance, and some are still distracted by the January barometer, which suggests the first month foreshadows trading for the rest of the year. Goldman, noting that a down January has predicted a down year precisely half the time since 1970, considers the barometer a hoax, and blames the market's recent lull on the dramatic rally that began in October. "We were cruising for a bruising and we got one," he said.
Of course, it's harder to make money in a more mature bull market. It's more challenging for companies to increase their earnings. Larger, higher-quality stocks, particularly defensive growth stocks with steady revenues, such as consumer products companies, pharmaceuticals and food stocks, may be better positioned than small-caps and riskier issues. Dividends are attractive. And when every percentage point of total return counts, buying low becomes more important than ever. Down days present buying opportunities.
"The best time to buy stocks is when you're most uncomfortable buying stocks," Goldman said. "The worst time to buy them is when it's easy to buy them, emotionally."
Regrettably, small investors rarely buy the right stocks at the right time, a painful point driven home by recent fund flow data. Flows have been weak so far this year, and during January, the only money going into stocks was going overseas. Only in the last several weeks has more money been coming into U.S. equity funds than global funds, said Charles Biderman, president of TrimTabs.
"Here's the truth ... whenever the percentage of new money going into global funds is very high, it's typically right after the dollar has made a new low," Biderman said. "They miss it. They always start to buy global funds after the dollar has started to turn up. The truth about individuals is flow follows performance. When flows become big, for whatever reason, it's usually a turning point. Flows are typically a lagging indicator to the market and a contrary indicator at extremes."
Meanwhile, almost no money has gone into tech funds, a sector that has fallen far out of favor; the tech-heavy Nasdaq composite index has slumped 5.4 percent, year-to-date. For Biderman, who remains confident about the economy, this was an opportunity too good to resist. He recently bought shares of the Nasdaq 100 Trust exchange-traded fund (QQQQ) for a portfolio he keeps for his children.
"The time to really invest is when everyone seems nervous. If you're a long-term player and you're investing a portion of your money in the market every month, just buy a cheap index fund and forget about it." Biderman said. "The biggest mistake people make is when they stop investing during bad times, because they miss the benefits. That's how dollar-cost-averaging works. It's harder to buy when everybody is worried, but it's worth it."
