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BUSINESS DAY
Maybe Theres Life in the Old Bull Market Yet
MAY 24, 2014
Strategies
By JEFF SOMMER
Worried about the stock market? Theres no shortage of reasons to fret.
Weak economic data, lackluster earnings reports and a severe
correction in the Internet and biotech sectors have shaken many investors.
Yet none of that fazes Laszlo Birinyi. The gloom that has descended
over the market recently is for him a source of good cheer.
Why? Were in the last stage of a great bull market, he said in a
phone conversation last week. Its the exuberant phase.
Yet investors arent acting all that exuberantly, which is a good thing,
he says, because the long rally underway since early 2009 is likely to end
only after the party becomes dangerously wild. From that perspective, a
dose of sobriety is salutary, a good sign. It suggests that the bull market
has plenty of room to run.
Most of what passes for news about the market is really noise, he
said. You need to stop and think and do your research. When you look
deeper, you see a different picture.
What he sees is a largely benign environment for stocks a generally
happy picture that he has painted, with relatively minor alterations, since
he became one of the first prominent strategists to recognize that a major
bull market started more than four years ago.
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Mr. Birinyi, 70, is a veteran market hand: He headed equity market
analysis for the old Salomon Brothers brokerage firm, where he worked
with Michael R. Bloomberg, the former New York mayor, and Michael
Lewis, the author, most recently, of Flash Boys (Norton), a critique of
high-frequency trading in the stock market. Mr. Birinyi now runs his own
independent money management and research firm in Westport, Conn.,
Birinyi Associates. He recently published a book, The Master Trader
(Wiley) in which he levels a critique similar to that of Mr. Lewis, though he
quibbles with Mr. Lewiss characterization of the market as rigged.
Id put it another way, he said. Opaque electronic trading has made
it much harder to track money flows in the market, he said, and to trade
with precision at certain moments, particularly at the market opening.
That, he said, tilts the odds so they are badly skewed against the
individual trader. Like Mr. Lewis, Mr. Birinyi says regulators need to be
more vigilant in protecting the public interest.
Still, he observes that ordinary investors who have stayed in the
market since March 2009 have generally reaped enormous profits, amid
many worries along the way. That upward trend is likely to persist, he says,
along with the worrying.
The conditions for a bull market remain intact, he said. But were
in an advanced stage now, and youd expect that some things would
change.
In this sense, he says, some of the apparent bad news of the last few
months should be re-evaluated. Much of it is actually positive, he says. For
example, after many warnings including one in this column in March
that biotech and Internet stocks appeared to be reaching irrational levels,
those two sectors have deflated, falling more than 15 percent since their
peaks earlier this year. Valuations in these areas had gotten out of whack,
and its only reasonable that they have fallen, in his view.
But the rout hasnt spread to the overall market. The Standard &
Poors 500-stock index, which tracks the large-capitalization stocks that
comprise the bulk of most portfolios, is clinging to positive returns for the
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year and has continued to set nominal records, most recently on May 13.
(Adjusted for inflation, however, the index is still about 7 percent below its
2000 peak.)
The overall market is shrugging off the tech and biotech problems,
and thats important, Mr. Birinyi said. Investors are differentiating
among individual stocks and sectors, and shares of many of the biggest
companies remain buoyant. Stocks like Oracle, Intel and Apple have all
gained in value this year. Because Apple has the largest market cap of any
stock, it has an outsize influence on major indexes like the S.& P. 500; its
strong recent performance is far more important for the great majority of
investors than that of numerous smaller tech stocks combined.
The earnings and economic data shouldnt be a source of worry now,
either at least not the way he sees things. Analysts have complained
about an impending sharp decline in corporate earnings for the last few
years, only to be proved wrong, and, he said, so long as the economy stays
reasonably strong, earnings will be robust enough to drive the stock
market.
As for the economy, he shrugs off the feeble first quarter for the gross
domestic product. It rose only 0.1 percent, inflation-adjusted, in the latest
government estimate, and may well drop into negative territory when the
data is updated Thursday.
But he points out that G.D.P. estimates are notoriously unreliable
they sometimes change significantly years later. While recent data for the
second quarter appears stronger, he prefers to look at the stock market
itself for clues about the economy. Shares of Caterpillar, the heavy-
equipment maker, have been strong, signaling that investors believe that
robust industrial growth is coming, he said. Similarly, he said, NVR, a
home-building stock, has risen smartly. That tells me that the market is
very comfortable with the housing sector, he said.
The persistence of low interest rates has surprised him. We didnt
expect that at the beginning of the year, he said. The implications of this
for stocks are complex but generally positive: Low rates may aid a
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continuing stock-market rally because they make stocks more attractive in
a bake-off with bonds.
Because the market has already risen so much, the biggest gains are
probably behind us, he says, and his own short-term projections have been
careful: He predicted that the S.& P. 500 would reach 1,900 in this
quarter, and it has. Barring a catastrophe (an unexpected war, for
example) it seems most likely to him that the markets momentum will
continue to trend upward.
Thats why, from his perspective, what others are calling bad news is
actually good. Its dampening the exuberant spirit that may one day stop
the bull market in its tracks.
But, he says, were not there yet.
A version of this article appears in print on May 25, 2014, on page BU6 of the New York edition
with the headline: Maybe Theres Life in the Old Bull Yet.
2014 The New York Times Company