Gene Marcial's Stock Picks April 20, 2009, 12:01AM EST

Marcial: A Fool's Rally?

Many pros think the market has already bottomed and have snapped up beaten-down big-cap stocks. But many of them are not willing to say the bear market is over

BW's Gene Marcial

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A fool's rally. That's how skeptics explain the stock market's 24% advance since the Dow Jones industrial average hit a closing low of 6,547.05 on Mar. 9. But is the unexpected upturn just a teaser—that is, a rally in a bear market?

The tug-of-war between the bulls and the bears rages on. Indeed, with the economy reeling, joblessness on the rise, housing in the dumps, and the financial crisis still unresolved, there are enough reasons to be wary.

One who is leery of the durability of the market's advance is Wall Street Journal columnist Justin Lahart. In a column last week he noted: "The Dow Jones industrial average is up 21% from the 12-year low it hit last month, and it isn't hard to come up with reasons the rebound makes no sense." And for "all the talk of economic recovery, what signs there have been are truly fragile, as Tuesday's disappointing March retail-sales report demonstrated," he added.

However, my colleague Michael Mandel, BusinessWeek chief economist, takes the contrary view. In his Mar. 25 column, Mandel prognosticated that "this market rally may be for real." One argument buttressing his optimism: "Since the [market's] low point [in March], the Federal Reserve and the Treasury have unveiled plans to pour as much as $2 trillion into the financial markets. That's a lot even in an economy as big as America's."

A Narrower Trade Deficit

In the meantime, the economy has shown tentative signs of coming back to life, notes Mandel. For example, on Mar. 25, the Census Bureau announced that new orders for durable goods, such as computers, rose by 3.4% in February, the first gain in seven months. Equally important, he says, the trade deficit in January narrowed to an annual rate of $430 billion, or 3% of gross domestic product, down from 5% a year ago. Mandel argues that as the trade deficit shrinks, the U.S. has to borrow less from China and elsewhere to finance imports, which means America's financial markets become less vulnerable in other parts of the world.

This week, some good news came on the earnings front. General Electric (GE), JPMorgan Chase (JPM), and Citigroup (C) reported healthy first-quarter earnings that beat Wall Street's forecasts.

Is there a middle ground in this debate? There is. Economist Ed Yardeni, president of Yardeni Research, believes the March low was indeed "the low for this bear market," but asserts that bear markets aren't always followed by bull markets. "We may be in a bottoming market, rather than an up-up-and-away bull market," he suggests.

So, what should investors do now? It's clear that many are taking advantage of low stock prices, as the market's massive meltdown has provided a boatload of opportunities. (The Dow has lost some 44% from its record close of 14,164.53, hit on Oct. 9, 2007.) Without doubt, stocks are priced at truly bargain levels, based on almost every market benchmark, including price-earnings ratios, cash flows, and intrinsic values relative to assets.

Where is the buying coming from? The billions of dollars that have been sidelined by reluctant investors in the U.S. and abroad will be the drivers of the market's next massive bull move. "As a result of the many months of market declines, there are now many trillions of dollars [historically record levels] on the sidelines waiting for the opportunity to achieve better returns [in the stock market] than those offered by cash," says investment manager Arnold Schmeidler, president of A.R. Schmeidler Investment Advisors. And as "we emerge from this period, the great values that are being created could result in investment returns that are the most attractive that have been seen in years."