Forget About This Stupid Rally

The market environment these days reminds me of a chant breaking out at a frat party. The chanters at such events don't seem to really care about the implications of what they're chanting for, they're just drunk and want to see a particular outcome.

I can almost hear it: "Rally! Rally! Rally!"

If you're reading this, it's very likely that you're at least at this raucous stock market party. And let me tell you, just like in those hazy frat houses, it can be really hard not to join in the chanting.

The excitement grows
Why is a rally so exciting? That seems all too obvious. Those invested long in the market -- which includes most investors -- are seeing stocks across the board head for the sky. Over the past month, the S&P 500 index shrugged off a quick downturn and crept up another 2%. Meanwhile, stocks like Amazon.com (Nasdaq: AMZN  ) and MasterCard (NYSE: MA  ) left the market in the dust with gains of 39% and 18%, respectively.

With each passing day, investors see their portfolios growing, and once again start to envision mai tais and white-sand beaches in their retirement picture. Does it matter what's driving the rally? Of course not! Does the market's valuation matter? Of course not!

"Rally! Rally! Rally!"

Sobering thoughts
But much like revenge, investing is best done when you're not all hot under the collar. Whether it's a rally or a market swoon, big movements have a tendency to rile up investors and get them to act in ways that are contrary to their best interests.

And it's not like the reasons to question the rally aren't recognized. Last week, my Foolish colleague Jordan DiPietro highlighted three things that could sober up this rally in a hurry. Namely, the continuing effect of the housing bust on household pocketbooks, the slowing of government spending, and a possible increase in the ridiculously low interest rates that central banks have been offering. Meanwhile, fellow Fool Alex Dumortier set to work debunking the myth that sidelined cash would drive the rally further.

To venture outside of the Foolish universe, PIMCO chief Bill Gross has been beating a drum against the rally for a while. In his most recent market commentary, he showed that over the past 50 years, asset values in the U.S. have grown faster than the economy. As he put it, over that time period "you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce."

If the correlation between economic growth and corporate profit growth that Gross found is of any significance, it seems very likely that we'll see the raging inferno of paper asset growth slow down to a timid smolder.

"Rally! Rally! Rally?"

Instead of chanting
If the "F" of "Foolish" stands for anything, it very well could be "Fundamental." If now seems like a time for anything, it seems like a good time for getting back to the fundamentals of investing.

What do I mean by this? Simply: Paying mind to Gross' concerns and focusing on productive assets and companies that are making real goods, and investing in those companies only when they're at reasonable prices. Companies like Goldman Sachs (NYSE: GS  ) , which thrive on the growth of paper assets, have been thrilling to watch over the past decade or so, but in the sober light of day it may be reasonable to question just how much value they're actually adding to anything.

I've been taking what I believe is a Foolish view of the investing landscape and eschewing the highfliers leading the rally in favor of companies with real output that I can invest in at a fair price. Here are a few of the companies that I have my eye on:

Company

Business

Forward P/E

Dividend Yield

Johnson & Johnson (NYSE: JNJ  )

Pharmaceuticals, medical devices, consumer products

13.1

3.3%

Intel (Nasdaq: INTC  )

Semiconductors

12.7

3.0%

McDonald's (NYSE: MCD  )

Fast-food restaurants

14.7

3.6%

United Technologies (NYSE: UTX  )

Diversified industrial products

14.6

2.4%

Sysco

Food distribution

14.3

3.6%

Source: Capital IQ, a Standard & Poor's company. P/E = price-to-earnings ratio.

In the end we can all feel free to cheer on the rally, but when it comes to placing your bets, your investment dollars are probably safer elsewhere.

Motley Fool co-founder Tom Gardner says that he needs only one metric to find great companies. Click here to find out which one.

Amazon.com is a Motley Fool Stock Advisor recommendation. Intel and Sysco are Motley Fool Inside Value selections. Johnson & Johnson and Sysco are Motley Fool Income Investor picks. The Fool owns shares of Sysco. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Matt Koppenheffer owns shares of Johnson & Johnson, Intel, and McDonald's, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy loves a good diagonal call.


Read/Post Comments (7) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 10, 2009, at 5:50 PM, ernieslog wrote:

    as is frequently the case the past is being ignored and the take on fundamentals is questionable. no matter what you say, there is money out there chasing returns as indicated by the fact that stocks, government bonds and gold all went up monday. also the fundamentals will improve as the effects of the recission recede. at the same time the current rally is sort of a joke, the market went down 50% and to get back to were is was it has to go up 100%, we are only half way there. we have a long ways to go. never-the-less the world is round not flat. what this means is that everything is cyclical. my prediction is the dow will see 14,000 in about two years. by the way while it went down by more than 50% i held on to the sixty or so securities i own and a bought a couple.

  • Report this Comment On November 10, 2009, at 6:02 PM, kokomojo1066 wrote:

    No matter how the market goes, retired people on limited income are going to take a pounding.....interest rates are down to force people into the market in the hope of getting something to replace the lost income from interest.....when we all are invested, the bottom will drop out and thems that have will have even more, as they buy on the downturn, while the poor retirees, who have no business in the stock market casino, will lose even more and be on welfare.......

    The financial/political establishment is playing us all for suckers for the second time in a century.

    Never has it been so obvious to me that ordinary people are like slow-swimming fish in a tank of sharks.

  • Report this Comment On November 10, 2009, at 6:57 PM, jfrankh57 wrote:

    Pure capitalism is cutthroat and ultimately one-sided---what's in it for me. The mantra is alive and well. The excesses of Wall St and Main St are still evident. Where is that public company, owned by the stock holders, that should give wealth to those stock owners, hiding these days? Where they have been for many years, in the back pocket of the CEOs who manage Boards of Directors with adroit finesse or brute force. Whatever the CEO can get, he/she will get and leave scraps for the average stock holder. I love the idea of capitalism, but then I do believe in the responsibility of good corporate citizenship---not to ruin, not to excess, but to good stewardship for the owners (stock holders), for the customer, for employees and for society. A company should be the personal piggy bank of the sole proprietor and not the CEO of a public company.

  • Report this Comment On November 11, 2009, at 8:16 AM, daveandrae wrote:

    This post reminds of something my financial advisor once said to me a long time ago...

    "Don't worry about being in the market during the next 30% decline. Worry, a lot, about being out of the market during the next 150% advance"

    Equity investing is not about "timing." It's about time IN. I should know. I started investing in 1998 when the s&p was trading at 1175. My portfolio has grown by more than 7 fold since then.

    You really need to study your stock market history. The secular decline of the last bear market went on for more than nine years. Peaking at s&p 1525 in March of 2000, and bottoming at 666 in March of 2009. The last time the s&p 500 fell more than 57% over a nine year period, from a price to book ratio of 10, was 1929-1938. The subsequent rise was more than NINE FOLD over next three decades!!! The market did not truly peak until December of 1968.

    Thus, if history is any guide, then we have a loooooonnnng way to go before this "stupid rally" begins to truly fade away.

    David

  • Report this Comment On November 11, 2009, at 9:39 AM, ernieslog wrote:

    yes, some retired people got hurt. i got hurt but i expect to recover as i have in every other downturn and i will be 82 in about two weeks, but not retired. i have been thru a lot of downturns. i think some people panic in a downturn and sell some very good stocks that take a hit, and others purchased the wrong things like the dot.com's that went sour and some people do not diversify and finally some people buy mutual funds which, with few exceptions are always a poor long-term investment. It is diversification and patience that has saved me in the past.

  • Report this Comment On November 11, 2009, at 10:24 AM, noryakerson wrote:

    Boy, I feel like such an idiot. I have been paying a lot of attention to this stupid rally (9 months and counting), believing in it, and I've recouped all my losses from the past 2 years and then some. I'm such an idiot.

  • Report this Comment On November 11, 2009, at 10:43 AM, acbill wrote:

    I believe this rally is all about and for the big banks. I remember back in June as I recall when Obama had all the big wall street bank ceo's to the big house for a closed door meeting and since then it's been up up and away. As long as the fed is giving these guys money at 0% this rally will go forward. The govt's plunge protection team is not allowing any decline and the banks are bidding the market up every day with their free fed money. I was not in the market for the first part of the surge upwards but got back in in sept realizing what was going on. I believe it is safe to be in thru 3/10 but we could see a 15-20% pullback in late spring 2010. All I would advise is to keep your sell stops tightly adjusted. It has been great to get back most of what evaporated from my accounts in '08. GO Bernanke, you bubble machinist!

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