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We've seen the market zoom up from its lows in the 6,000s to around Dow 8,000 over the last month, largely on positive banking news including the unveiling of the Public-Private Investment Program and better-than-expected banking earnings from Wells Fargo (NYSE: WFC ) and Goldman Sachs (NYSE: GS ) .
Is this a bear market rally or the start of a sustained recovery? And if we are headed for a fall, which companies are overvalued? We asked our motley crew of analysts, writers, editors, and advisors.
Alex Dumortier, Motley Fool Writer: This is almost certainly a bear market rally built on hope and dreams rather than an objective assessment of the present situation. Take Wells Fargo's buoyant earnings pre-release, which sparked a broad stock rally last Friday: It was pretty skimpy in terms of hard data, and there could well be an unpleasant underside to the lender's financial condition. What about the PPIP, which will allow banks to shed their toxic assets? As far as I'm concerned, it's more of a concept at this stage than a road-tested solution to the problem.
The credit crisis began over 18 months ago, but it's been barely six months since the S&P 500 fell below 1,000 -- a level at which it is significantly overvalued. Given that the fundamental issue of bank insolvency remains like a sword of Damocles, hanging over the economy and the market, I think we should expect other bottoms such as the ones that occurred last November and last month. Stocks that have enjoyed the large run-ups since March 9, such as Wells Fargo or Citigroup (NYSE: C ) may be particularly vulnerable to a correction.
Robert Brokamp, Advisor, Rule Your Retirement: When it comes to investing, history is our best guide, imperfect as it is. As Rule Your Retirement contributor Doug Short demonstrated in our most recent issue, major bear markets end at lower market valuations than what we see today. Also, bear markets have a funny tendency to end in the second half of the year, for whatever that's worth. But, as Warren Buffett said, "If past history was all there was to the game, the richest people would be librarians" (something I'd fully support, since I'm married to one). Maybe history won't repeat itself. And as long as you're not investing money that you'll need in the next five to seven years, it may not matter.
Jim Mueller, Motley Fool Editor: Rally or recovery? I think it's a rally, and we have at least one more market slump ahead of us before a true recovery. Obama reminded us yesterday not to get too enthusiastic from a relatively short period of better than expected news because we still have a long way to go. Yesterday's retail news, too, reminded us that, while there might be some glimmers of light, it is still very stormy. One company that I think has gotten ahead of itself is Netflix (Nasdaq: NFLX ) . Yes, it probably grew subscribers better than expected thanks to the economy, but I don't think things will be as rosy as everyone may hope when it reports earnings next week. The price indicates to me expectations for a blowout quarter and raised guidance. I'd be surprised if both actually happened. Therefore, a significant correction from its recent run-up is definitely a possibility. Out on a limb with a short-term call, but there you are.
Morgan Housel, Motley Fool Writer: The economy seems to actually have a pulse again, and that's encouraging. When the government carpet bombs the economy with several trillion dollars over the span of a few months, things won't stay depressed for long, and stocks are sobering up to this reality. No one really has a clue, but the rally at least feels legitimate.
Yet, for some companies, the intensity and justification of the rebound is frightening. Banks -- particularly Citigroup and Bank of America (NYSE: BAC ) -- continue to perplex me. Investors have taken results from the two strongest banks and assumed it's transferable to the two weakest banks. That's an expectations disaster in the making.
These are two companies that would be six feet under without being tethered to Washington. Now they've quadrupled in value on no news going into a black hole of earnings announcements. If successful investing means "being fearful when others are greedy," investors should be scared witless of these two.
Todd Wenning, Analyst for Motley Fool Pro: This rally has certainly provided investors with a glimmer of hope, but I think it's gotten a little ahead of itself as we've switched from pessimism to optimism in only a few weeks. The best thing investors can do right now is not panic buy, remain focused and patient, and make a list of companies they'd love to buy at lower prices. That way, if the market does sell off this rally, as I expect it will, you'll be ready to capture those values.
Matt Koppenheffer, Motley Fool Writer: Was there a green light on the market that I somehow missed? Since March 6th, Bank of America is up 221%, and Citigroup surged 289%. Why? Because Wells Fargo announced better than expected earnings? And here I thought we already knew that Wells Fargo was in a class above B of A and Citi.
So far we've been seeing some signs of "second derivative recovery" -- i.e., the speed of the decline is slowing. However, we still have a tremendous glut of housing inventory, and bank balance sheets are about as clear as mud. And that's just to name a couple of lowlights.
I don't expect that we'll be mired in this bear market forever, but the height of the market bounce over the past month makes me a bit nervous given economic realities. I wouldn't be surprised to see some of the really big gainers -- the two mentioned above, Barclay's and its triple, or AIG and its 300%-plus run -- give back some of the ground they gained over the past month.
Andy Cross, Advisor, Hidden Gems: I don't know if the storm has passed us or if we're just in the middle of the eye, waiting for the next wave. My feeling is that it will take some time for this global, leverage-fueled hangover to work its way out of our economic system. But because the stock market typically leads bullish economic numbers, we need to stay invested in the best companies. What's interesting is that I've heard cocktail stories about how so-and-so picked up shares of Bank of America at $3. It's now at $10. Or AIG below a buck. It's at $1.50. So, people are buying and selling stocks, but to me it seems more like speculating or trading rather than investing. Be careful if you're playing a dead-cat bounce in low-quality companies, because they can go down just as quickly as they can go up.
Anand Chokkavelu, Motley Fool Editor: I'm agreeing with the others that we could see Dow 6,000 before Dow 10,000, so I won't rehash. Two non-banks that could see better buying opportunities are Best Buy (NYSE: BBY ) and Buffalo Wild Wings (Nasdaq: BWLD ) . They've both had good run-ups on favorable earnings reports, but both are driven by fickle consumerism. Both of these companies are high on my watchlist, but I'm waiting for some bit of negative news to give us better prices to pick up shares.