- The Washington Times - Thursday, February 14, 2013

Call it the Rodney Dangerfield rally. Like the economic recovery that underpins it, the bull market on Wall Street today gets no respect.

The stock market recently surged to five-year highs and appears headed within a few weeks to all-time highs for the Dow Jones industrial average, the Standard & Poor’s 500 and other major indexes.

Yet many professionals on Wall Street, businesses on Main Street as well as investors seem unconvinced that the rally is on solid ground. Many small investors also have sat out the rally, unwilling to enter a market that they fear will shift into reverse and wipe out their gains.

The deep skepticism can be seen in the market’s tentative and halting movements as it approached new highs in recent weeks. The Dow soared over 14,000 one day on modestly positive economic news only to shrink below that milestone the next day as doubts cropped up about the expansion, political tensions in Washington or the possibility of further weakness overseas. The Dow ended the day Thursday down 10 points at 13,973 — just shy of the 14,000 mark it pierced barely two weeks earlier.

Rarely has the market’s advance of more than 125 percent since hitting bottom nearly four years ago been accompanied by a more robust debate about why it is occurring.

For skeptics, the market seems to be on a sugar high caused by too-loose money policies at the Federal Reserve, which they say has stoked artificially low interest rates and enabled the U.S. government to keep piling up unsustainably high debts. They think the combined stock and Treasury bond bubble will burst and investors will rue the day they put their trust in the market. Many of these skeptics are heavily invested in stock alternatives such as gold, which they say will weather the coming reckoning in stocks.

“Rising stock prices have not convinced many Americans to get into the game,” said John Browne, senior economic consultant at Euro Pacific Capital, a contrarian investment firm that touts gold as the best value in today’s shaky economy. “While the Dow has in fact surged in nominal terms, the leading U.S. equity funds continue to show significant outflows of investment funds,” reflecting the public’s doubts about the foundations for the market’s rise, he said.

Bulls see good signs

But bullish stock gurus are unapologetic in trumpeting the market’s virtues. They point out that the environment for stocks has rarely been so favorable. Labor costs — the biggest expense for most businesses — have never been so low nearly four years into an economic recovery. That has enabled corporations to plump up their profits, pile up record amounts of cash, focus on strategies for expanding business in promising areas overseas, and cut costs ruthlessly when necessary to maintain excellent financial health and impress investors.

Market bulls also point out that stock valuations at about 15 times earnings on average remain historically low, suggesting the market still has room to grow. They also applaud the record low rates and lenient policies at the Fed, which they say have enabled corporations to easily refinance and issue debt, for considerable cost savings in recent years, while making stocks far preferable to the negligible returns investors receive on bonds and money market funds. They say the Fed’s easy money policies are clearly justified in light of the economy’s sluggish growth and stubbornly high unemployment rate.

Stock market bulls point out that federal deficit spending, while a danger in the long run, has benefited investors and many corporations for years by driving profits in defense and health care, among other industries, while propping up demand in the economy and profits for the business sector at large.

Bulls also like the market’s slow and fitful recovery, saying it’s normal for stocks to have to climb a “wall of worry” before broaching new highs.

Scott L. Wren, senior equity strategist at Wells Fargo Advisors, expects stocks to move to new highs this year, with the S&P 500 working its way up to a record around 1,575.

“The market started off the year with a bang,” with the S&P 500 surging nearly 6 percent in January after notching an impressive 13.4 percent gain in 2012, despite signs that economic growth stalled at the end of last year amid the budget wars in Washington, he noted.

The secret to the market’s success? “Companies overall have figured out how to make money in this slow-growth environment where inflation has not been a problem and costs have been contained,” he said.

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