Don't Miss the Second Year of this Bull Market

Are you an individual investor that failed to participate in last year’s stock market recovery?   Do you believe the stock market has gone up so fast that it can only go down from here?  Do you regret selling your common stocks last year?  Is this regret so deep that you secretly hope the market will come tumbling down to prove you were right?  If you are, don’t feel too bad… you are not alone.  You are actually in the majority.

It seems the greater part of investors have a hard time understanding that bull markets always follow bear markets.  In fact, you can be assured that our current bull market, which started a year ago this month, will continue to climb a “wall of worry”.  It is when the worry stops, and the greed takes over that the bull market will come to an end.  

Using history as our guide, we may notice the bull markets that have followed bear markets have lasted at least three yearsThe first year provides the greatest returns and is lead by the stocks that declined the most. For the record, the past nine bear markets, in which the S&P 500 declined greater than 20% from the previous high, stocks recovered 45.6% in the following twelve months.*

In the second year following a bear market, the S&P 500 averaged a gain of 15.41%.*    We are now in the second year and as long as the worry continues, I feel comfortable saying that this time is not different, and the market will be higher twelve months from now.

The second year, post-bear returns are lead by companies that continued to provide consistent earnings, pay cash dividends or buy back their own shares, and maintain their price a little better during even the worst of times.   So please don’t make the mistake of buying last year’s biggest winners, concentrate on companies who will benefit from a recovering economy. 

Companies such as DIRECTV^₁, whose management has announced a $3.5 Billion stock-repurchase program and is trading at 11.7x estimated 2011 earnings.  The company has added over 900,000 new customers in 2009 and hopes to add more as they introduce one of the industry’s first 3-D channels this year.

Oracle Corporation^₁is trading at 14 times its expected 2011 earnings, and last year paid its first cash dividend.  Oracle’s recent purchase of Sun Microsystems could have an immediate impact to earnings as they realize the efficiency gained from integrating Sun’s operations into the company.

McDonald’s Corporation^₁was able to increase earnings 18% in the last year.  One of America’s greatest companies, McDonald’s has experienced strong results in the European, Asian, Middle Eastern and African markets.  The current dividend expected over the next 12 months is $2.20 per share, giving the company a dividend yield of 3.28%.  Trading at 14 times expected 2011 earnings, with a rock solid balance sheet, the company should reward current owners well.

John Train, money manager, author and friend to some of the worlds’ greatest investors has shared this advice that each of us should remember.  “The worse you feel, usually because the news is bad, the safer the market is.  The better you feel, usually because the news is good, the closer you are to a top”.

Listen to the radio, read a newspaper, a magazine, a blog, watch a little TV and you will quickly find a reason to worry.  Don’t buy it, buy a few good stocks instead and let your portfolio climb the “wall of worry”.

*Market Statistics provided by O’Shaughnessy Asset Management

1.  Kendall J. Anderson, CFA personally owns shares of this company.