Is The Bull Market Back Again?

An increasing number of market analysts are predicting that this is the start of a new bull market in equities.The latest to lend support to this theory is Abby Joseph Cohen of Goldman Sachs.She feels that the new bull market started in March of this year and that markets can rally a further 10% from here.She sees the S&P 500 index at between 1050-1100 by the end of the year. But she feels that labor markets will be slow to improve and will do so in an erratic way,although the recession,if we use GDP numbers,is almost over.Typically the economy starts improving a few months before the labor market feels the impact.However she has predicted a 'staircase' kind of recovery instead of a 'V' shaped one.



Why is the economic gloom lifting suddenly?There are several indicators that things may finally be brightening up.Firstly and most importantly there is good news on the housing front.Residential home sales are improving and inventories are going down.Housing and related industries put together are perhaps the largest employers in the economy.Upbeat housing data is expected to positively impact both employment as well as consumer spending.However home prices need to stop falling before this sector really picks up again.Then again banks have started repaying TARP funds which indicates easier liquidity conditions in the market.Key indicators of perceived credit risk in the economy are down below 1%.Second quarter results posted by companies have been encouraging.Key sectors like technology,commodities and financials are rallying once again which suggests that industrial activity is picking up once more.



Nevertheless there are diehard skeptics who say that the present recovery in the stock market is nothing but a sucker's rally.Their argument is simple.They point out that that it was the deflation in home prices which triggered the bear market and the recession in the fall of 2007.There are still no signs that housing prices have stabilized.Latest figures show that although the rate of decline in prices is slowing,prices are still down over 12% this quarter from what they were a year ago.Experts are warning that they expect almost 30% of all mortgages to be underwater by next year,and a new wave of foreclosures is set to hit the market.The commercial real estate market being in the greatest danger of collapse.The profitability of companies has improved this quarter due to cost cutting and not due to any improvement in their sales figures.If this were not enough the average American has started saving.The savings rate is around 8% presently and may rise to 10%.This points to weak economic growth going forward.Added to all this is the fear that interest rates may start rising by the end of the year to prevent runaway inflation expected as a result of the loose monetary policy being followed by the Fed.

However convincing this argument may sound, it ignores one basic fact.There are about $11 trillion on the sidelines waiting for an opportunity to be invested.Stock prices like prices of any other article are more a function of money availability rather than of value.Excess money in the system can only lead to higher stock prices in the short to medium term.The 'Bull' is definitely back for the time being.