I realize the market is a discounting machine -- with investors collectively trying to anticipate future events and price shares accordingly -- but let's face it: This rally we've been on since March -- recent fits and starts aside -- is ridiculous.
Wall Street is on a bender (yet again), and the shiny, happy future it seems to be looking forward to overlooks the fierce grimness of now. It's a mirage, at least in the near term. Maybe the middle term, too.
You may be right; I may be crazy
Still, it's worth pondering just how much longer this particular bout of irrational exuberance might last. If the market can make it here, after all, it can make it anywhere.
Unemployment ticked down last week, but only because fewer folks are even trying to find a job. On another crucial economic front -- global debt -- the earlier Dubai debacle apparently presaged a more pressing but similar concern for the likes of Greece, Italy, and Spain.
True, there has been some better economic news. Most critically for U.S. investors -- and consumers -- the dollar has strengthened of late. Yet amid Washington's calls for a dramatic rise in exports -- which would be great if we were mainly a manufacturing economy -- how long can that last?
Not long, I suspect. Indeed, a weak-dollar policy is surely part of the government's stimulus mix. That's fine as far as it goes, but what if it goes too far? A beaten-down currency can work wonders for a while (by making our goods and services cheaper abroad), but there's always the risk of permanent currency erosion.
Yet the market has been on a tear, with the S&P 500 climbing 55% from its March lows. Even the financial sector has joined the fun, chipping in a double-digit gain over the past 12 months.
This particular mirage is a mesmerizing doozy, with the likes of Goldman Sachs (NYSE: GS ) and Morgan Stanley (NYSE: MS ) rocketing to massive yearly gains. Capital One (NYSE: COF ) and Bank of America (NYSE: BAC ) have racked up huge returns over that stretch too, even though the black hole at the center of our financial galaxy -- i.e., those pesky toxic assets -- remain, well, toxic.
With that as a backdrop, it's worth asking whether additional financial-stock moon shots can be far behind, even from the sector's currently inflated level. I don't believe such a rise would be warranted, at least not based on fundamentals.
Indeed, I'm among those who believe that the financial sector should return to its former lack of glory and become a comparatively much smaller slice of the market's pie chart, complete with permanently shrunken market caps for former big boys.
Between now and that smaller, shabbier future, though, there may be money to be made, largely by speculators betting that the financial sector will essentially become a government entitlement program -- albeit one that puts up with little of the pesky regulatory oversight that attends, say, Medicare or Social Security.
For those who prefer to invest rather than speculate, there are far smarter ways to proceed, and to align your portfolio with what a sustained market recovery will probably look like. As shell-shocked investors return to equities, they'll likely do so judiciously, newly aware of the benefits of certain flavors of bonds, for example. And for the equity sleeves of their portfolios, a focus on revenue kingpins with tremendous track records of success -- and beaten-down share prices -- will be in order.
Electronic Arts (Nasdaq: ERTS ) , Hasbro (NYSE: HAS ) , and Lowe's (NYSE: LOW ) , for example, have those first two attributes in spades. But they're on my watch list (rather than in my portfolio) because I think their valuation profiles will become more attractive when our dead cat finally touches down back here on planet Earth.
Amid tough economic sledding, I see dim growth prospects ahead, a dynamic that afflicts the market at large but that favors companies (and investors) who recall the moral of the tortoise-hare tale: Slow and steady wins the race.
The Foolish bottom line
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This article was originally published on May 4, 2009. It has been updated.
Shannon Zimmerman runs point on the Fool's Duke Street and Ready-Made Millionaire services, and he runs off at the mouth each week on Motley Fool Money, the Fool's fast-and-furious podcast. A fresh edition of MFM hits iTunes each Friday, and you can listen at iTunes. Shannon doesn't own any of the companies mentioned. Electronic Arts and Hasbro are Motley Fool Stock Advisor picks. The Fool owns shares of Hasbro. You can check out the Fool's strict disclosure policy right here.