Happy Days Are Here Again

But how long will they last?

John Rosevear
John Rosevear
Apr 7, 2009 at 12:00AM

We've come a long way in the past month. It's almost hard to remember that just a few weeks ago, back in early March, it looked like the world -- financially speaking, anyway -- was about to end. General Electric (NYSE:GE) closed at $6.66 on March 5 amid rumors of its possible demise, and the S&P 500 bottomed around 676 a few days later -- and then that giant rally happened.

For once, my timing was pretty good: Thinking we might be near some sort of bottom, if not the bottom, I bought several stocks during that ugly first week of March, and I've seen some outstanding returns. As I write this, BP (NYSE:BP) -- which I bought as a long-term dividend holding, not at all with big growth in mind -- is up 15%, industrial equipment auctioneer Ritchie Bros. Auctioneers has climbed 38%, Autodesk (NASDAQ:ADSK) is up an incredible 46% ... these are amazing one-month returns.

Not everything I bought has worked out well -- after pondering the stock for months, I finally bought longtime Fool favorite KHD Humboldt Wedag (NYSE:KHD) just in time for a disappointing earnings release, and I'm down almost 17%. But still, overall, my portfolio has made some seriously impressive gains in the past four weeks. If you're invested in stocks, odds are that yours has, too, with the S&P up more than 20% over that time.

So here are two questions for both of us: Can this rally last? And what -- if anything -- should we do if we think it won't?

A bear in bull's clothing?
Most attempts to explain the reasons for this rally boil down to, "The news just got less bad for a while." The big banks hinted -- credibly or not -- that things were looking up, GE's credit rating got cut -- but only one notch -- and suddenly there was the faintest glimmer of light from the end of the tunnel.

But -- at the risk of excessive metaphor mangling -- is the source of that light the onrushing train of first-quarter earnings? If so, it might be arriving shortly -- earnings season begins full steam later today with reports from heavy hitters like Alcoa (NYSE:AA), Bed Bath & Beyond (NASDAQ:BBBY), and Mosaic (NYSE:MOS) due after the market closes. The concern I've seen expressed by several analysts isn't that earnings are going to stink -- we already know that's likely. It's that management teams will be unable or unwilling to offer anything like an optimistic outlook for coming quarters.

Of course, management predictions about performance aren't particularly accurate even during the best of times, and they aren't going to be any more accurate now. But accuracy isn't so much the concern -- sentiment is. Too many dour predictions could shake the optimistic mood that has drawn investors back to the stock market and send values downward again, or so goes the theory. I think it has some merit, but we'll see.

Long story short, I don't know whether this rally will last or not, but I wouldn't bet the proverbial farm on it.

What I'm doing now -- and what you should do, too
So what should we do? Here's what I've been doing: My retirement portfolio is about 70% invested in stocks at the moment. I expect to keep that money in stocks whether the market tanks again or not. In fact, I'm likely to add more stocks gradually over time -- but I may get greedy about it if the market heads back down toward its lows.

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Why? Because I have another 30 years or so before retirement. Because -- while it's true that not all stocks are "cheap" by historical standards at current prices -- there are plenty of values to be had, values that may look like screaming bargains in just a few years. Because as bleak as things looked a month ago -- and as bleak as they may look again a month or three hence -- one thing that's always been true of recessions and depressions is that they end.

I don't expect the world to collapse. I don't expect decades of misery. I do expect many of the stocks I've been buying to give me significant gains over time. And I think anyone who is more than 10 or so years from retirement should be thinking carefully along these same lines.

And you might -- just might -- want to consider the possibility that the worst is behind us.