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For now, stock surge putting the bears back in their dens
Don't fixate on market's gyrations, say experts who think there are more reasons for optimism.
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Our retirement portfolios would be in sweet shape, regardless of the volatile stock market, were they full of Hawkins Chemical, the southeast Minneapolis manufacturer that can boast a great return for shareholders over the last several years while paying its executives modestly.
Hawkins is up about 40 percent over the past two years, an anomaly for many investors who have seen their equity portfolios sliced in half from October 2007 through March 2009.
But the good news for investors is that the stock market has rebounded. And there may be more to come.
The Bloomberg-Star Tribune index of Minnesota's 100 largest public companies, including Hawkins, has posted total returns so far this year, including dividends, of 19.0 percent. That compares with 17.8 percent for the S&P 500 and 14 percent for the Russell 2000 index of small-capitalization companies.
Big Minnesota gainers, up 50 percent or more this year, include Health Fitness Corp, the operator of worksite fitness centers and health programs; Winmark Corp., parent of Play It Again Sports and other retailers of used merchandise; health club operator Life Time Fitness; Tennant Co., the maker of office and street-cleaning equipment; and Ameriprise Financial, the best performer among Minnesota financial stocks.
That said, we're still far off the highs of 2007 and far from a humming economy.
All the same, the doomsayers who predicted economic apocalypse last year are crowing less. The economy grew at a 3.5 percent rate in the third quarter, aided by federal stimulus spending and car discounts. And a stock market surge that pushed the Dow Jones industrial average above 10,000 last month has put the bears in their dens for now.
"We see potential for the rally to continue," said Doug Ramsey, research director at the Leuthold Group, which has a record of going bearish before periods of market euphoria. "Large-capitalization stocks are about at fair value. As the economy and sentiment improve, there's nothing to say they can't go above fair value."
Leuthold estimates "normalized" Standard & Poor's 500 earnings of about $65 next year, which means the S&P index trades at about 16 times earnings -- about average. During bull markets, it has traded at well over 20 times earnings for extended periods.
Leuthold, which is maintaining the maximum 70 percent in stocks in its Leuthold Core and Leuthold Asset Allocation mutual funds, will tell investors later this week in its November market update that the signals it watches are still positive, including the fact that most investors are still skeptical.
"Year to date, only $10 billion in investor money has flowed into U.S. stock funds and $300 billion has flowed into bond funds where they earn about zero on short-term Treasury bills and 3.5 percent on long-term bonds," Ramsey said. "Thirty times the money into low-return bonds? I still like the skepticism.''
Ramsey believes the S&P 500 could climb another 10 to 20 percent, up to 1,250, by next winter amid an improving economy.
Optimists such as Jim Paulsen of Wells Fargo Capital Management, believe the market is steadily climbing a "wall of worry" in fits and starts.
That is, once-burned investors are just starting to think about stocks, even as they cope with occasionally negative headlines. Meanwhile, institutional investors will increase their market exposure as they realize the economy is recovering and don't want to miss out.
Paulsen told Yahoo's Tech Ticker on Monday that the negative news will be overcome by a better-than-expected holiday shopping season and an improving economy that will return people to work. And that will be good for the consumer economy.
I believe the improved stock market presages an improving, more-resilient economy, healthier retirement accounts, more manufacturing of low-energy, high-quality Fords and other products, and millions of American going back to work next year.
Maybe even a few more newspaper advertisers? I already called Santa to ask him.
Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com
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