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 2009 -- 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 has lately ticked down a bit, 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 Greece.
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 more than 50% from its 2009 lows. Even the financial sector has joined the fun, leading the markets over the last 12 months.
This particular mirage is a mesmerizing doozy, with the likes of Bank of America (NYSE: BAC ) and Capital One (NYSE: COF ) rocketing to massive gains, even though the black hole at the center of our financial galaxy -- i.e., those pesky toxic assets -- remain, well, toxic.
History repeats?
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.
Get smart
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 growth-oriented revenue kingpins with successful long-haul track records -- and beaten-down share prices -- will be in order.
Apple (Nasdaq: AAPL ) , Google (Nasdaq: GOOG ) , and eBay (Nasdaq: EBAY ) , 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. PepsiCo (NYSE: PEP ) and Visa (NYSE: V ) are two more watch-list candidates for me: Terrific companies too richly priced.
Amid soggy economic sledding, after all, near-term growth could be tough for any of the above to achieve. That dynamic afflicts the market at large, but it favors those companies (and investors) who recall the moral of the tortoise-hare tale: Slow and steady wins the race.
The Foolish bottom line
Against the current market backdrop, that's a tale well worth bearing in mind and one that dovetails with a host of companies my colleagues at Motley Fool Inside Value have identified for their members. Inside Value's market-beating recommendations come with "buy-below" prices to help guide you to the right time to buy, too. That's handy indeed. If you don't have the quality (or quantity!) time to don a green eyeshade and conduct deep-dive fundamental research and valuation work, not to worry: They've done it for you.
Even better, you can check out the service's complete list of recommendations for the low, low price of, well, nothing. Click here for 30 days of complete access to the service that helps you "invest like an adult." Even your inner child -- if not your inner speculator -- will thank you for it.
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 radio show and podcast. Shannon doesn't own any of the companies mentioned. Google is a Motley Fool Rule Breakers pick. Apple and eBay are Motley Fool Stock Advisor choices. PepsiCo is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a bull call spread position on eBay. Motley Fool Options has recommended a roll your diagonal call position on PepsiCo. You can check out the Fool's strict disclosure policy right here.
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