When the market crashed in 2008, Wal-Mart (NYSE: WMT ) was one of the only life preservers for investors. When it staged a remarkable rally in 2009, everything from mining stocks like BHP Billiton (NYSE: BHP ) to retail stocks like J. Crew (NYSE: JCG ) came rocketing back. Now, in 2010, things are bumpy again, with even winners like Apple (Nasdaq: AAPL ) and Amazon (Nasdaq: AMZN ) giving back some ground. Uncertainty abounds, and just about the only sure things right now are debt and taxes. So is the bull market over, or just taking a break?
Doug Roberts, founder and chief investment strategist of ChannelCapitalResearch.com, told me in an interview that he thinks we are in a cyclical bull market within a secular bear market. A cyclical market is shorter-term; it can last two to seven years, with the bull phase lasting four to five years and the bear phase lasting one to three years. We had a cyclical bull market from 2003 to 2007, and now we’re in another one. Portions of a secular market, on the other hand, could last 16 to 20 years, for a total movement of 32 to 40 years.
Roberts maintains that a new secular bear market started in 2000 as America’s economic dominance came into question. He purports that we could be in the current secular bear market for some time to come.
What’s an investor to do?
Have no fear. Just because we’re in a secular bear market doesn’t mean profits can’t be made. After all, there was a big cyclical bull market during the Great Depression.
Roberts encourages investors to “Follow the Fed” for investing success. The strategy is based on the thesis that money and credit policy is the driving factor in the performances of stock prices and earnings. Those who do not have capital cannot grow.
In the current environment, the Fed has lowered rates to unprecedentedly low levels and flooded the system with liquidity through unconventional means. “If the Fed is pouring that massive amount of liquidity into the system, it tends to favor [small caps] and gold,” Roberts says. “... As liquidity starts to tighten up, that’s when you want to be in larger-cap stocks [and] probably Treasury bonds.”
Though the Fed has plans in place to unwind its emergency liquidity and lending facilities over the next two months, Roberts says the real question is whether they’re really doing it, or it’s more a formality. In other words, liquidity may be here to stay for the foreseeable future. Roberts notes that the environment appears to be starting to favor small caps more. “It didn’t used to be like that, but you’re just starting to see a bit of a transition now,” he says, adding that the real question is whether the government will continue the stimulus or let it fade.
In a secular bear market, Roberts says, the government becomes the lender -- and spender -- of last resort. “Without government assistance, the economy and market can descend into a protracted downturn ... There’s a good possibility that they may have to do some additional stimulus. What form it will take is up in the air. It may hit some speed bumps.”
Right now, Roberts recommends investors take a less aggressive approach to their asset allocation, as this is an uncertain market: “I wouldn’t shoot for the hills in this environment.”
Technology, health care and MLPs will outperform
Roberts says he prefers to gain exposure to the market through sectors rather than individual companies. He recommends using exchange-traded funds or mutual funds.
Roberts favors technology, health care and Master Limited Partnerships (MLP’s). MLPs are similar to real estate investment trusts and generate income from business in the real estate, commodities, or natural-resources spaces. Roberts favors a broad base of MLPs. “They have a nice high yield dividend, which is useful in this economy,” he said. “Yet if we’re going to do a tremendous amount of infrastructure and a buildup, many of them are in a position to [benefit].”
As for technology, if the recovery is U-shaped, Roberts says companies will make greater use of technology instead of hiring new employees because it’s cheaper and gets the job done. He also finds valuations in the health-care sector appealing now that odds for the passage of health-care legislation have fallen.