The stock market has had an impressive spring rally, responding to signs of an economy on the mend. Market volatility levels have returned to normal, or at least levels that have not been seen since back in September, before the Lehman Brothers bankruptcy. It has been a wild ride since then hasn’t it? Stocks declined 42% from the Lehman bankruptcy to November 2oth, rallied 21% at year-end, only to decline another 28% to start the year. Since March 9th, the stock market has recovered another 35%, but is still 28% below where it was last September, and 35% below where it sat one year ago.
So where does that leave us? The worst in the economy and the stock markets is behind us, but real growth is still down the road. The economy, though stabilizing, is still not expanding and not creating jobs. Earnings are improving but still in decline. It would be nice to think that stocks would keep going up from here, but as we have seen, the market is prone to pullbacks.
The stock market is at a crossroads, one where fundamentals matter again. This is perhaps the most encouraging news we have heard from our portfolio managers lately-that company fundamentals matter again. When stocks sold off last fall, everything got sold, no matter how cheap the stock price was or what its long-term prospects were. Recently, the tide has been lifting all boats, regardless of how “leaky” the company’s earnings or financial statements. But now things are getting back to normal and fundamentals matter again. We think this is great news for long-term investors and our clients, because our discipline has always been based on fundamental earnings growth and valuations. Patience!!