Columnist and money manager John Dorfman, who called the recent upturn in the market, says he believes the rally is sustainable until at least early 2010, in large part because the economy is on the mend.
“To be sure, not all signs point to the rally continuing,” Dorfman writes in the Asbury Park Press. “On balance though, I think the evidence favors continued gains, pockmarked with occasional rude interruptions.”
Dorfman points to both the Conference Board’s index of leading economic indicators, which rose in both April and May, and Ned Davis Research’s own leading indicators, all 12 of which are now signaling a recovery, as good signs for the economy. “Specific items I find encouraging are monthly auto sales for U.S.-made cars (up 14 percent since February), building permits (up 4 percent in May after being down in nine of the previous 10 months), and the pattern of interest rates, often called the yield curve (which is normalizing),” Dorfman says.
Dorfman also notes that stock valuations are “normal”, with the S&P 500 selling for 14.5 times earnings (which are depressed), twice book value, and 0.94 times revenue. Treasury yields remain low, he adds.
Market history is also on investors’ side, Dorfman says, referring back to the “waterfall declines” trend he wrote about in February. The fall 2008 plunge was the 11th waterfall decline — a decline of at least 20% over a few weeks — since the beginning of 1929, and in the 10 previous cases, he says, “the big decline was followed by a basing period, then a rally. In nine of the 10 cases the rally lasted at least a year. In the sole exception, 1929-1930, the market stayed roughly flat. While history doesn’t come with guarantees, the pattern suggests an uptrend continuing at least until next spring.”
“What happens after that depends on how forceful, and how lasting, the recovery is,” Dorfman says. “An onerous federal deficit, high personal debt, a persistent fall in home prices, or ripple effects from high unemployment could all keep a damper on the recovery, or shorten it.”