(Fortune Magazine) -- The stunning drop in stock prices dominated the headlines for days in late July -- and not just in the business press. The major market averages in the U.S. fell approximately 5% in a week, the largest weekly decline in five years.
The steady rise in share prices that preceded the plunge contributed to investor complacency; bond buyers were not demanding enough compensation for the risks they assumed. Now fear has replaced complacency, and risk is more appropriately priced.
As a result -- and most important because I do not believe recent credit-market turmoil will derail the economy -- I view this market drop as a long overdue correction rather than the end of the bull market.
My outlook for the next 12 months has not changed. I believe there's limited downside risk in the U.S. stock market from current levels, and returns over the coming year should be in the low double digits.
One key reason is that we are enjoying steady employment growth, averaging 145,000 jobs a month so far this year, which should mitigate the effects of recent debt-market troubles and housing weakness.
In defense of my notion that the equity market is unlikely to fall sharply from current levels, I would note the following: First, bull markets do not die of old age, they die of excesses such as accelerating and above-trend economic growth, rapidly rising inflation, and interest-rate hikes from a hostile Federal Reserve.
Those excesses are simply not with us today, nor do I expect their arrival anytime soon.
Second, the current bull market has experienced no price/earnings ratio expansion -- unlike every other bull market in the past five decades. In effect, this bull market is not characterized by speculation; rather, its expansion has been restrained compared with earnings growth and the trend of inflation and bond interest rates.
Wednesday, August 8, 2007
Leon Cooperman: Why I'm A Bull
Why I'm a bull.