The time seems right‹Finally!

After a ferocious run through most of March, April and May, global equity markets stagnated for a while and then fell for about 5 weeks. The MSCI ACWI (All-Country World Index) peaked on June 2 at +48.6% above its March 9 low. It then spent most of the next 5 weeks drifting down, for a net loss of –7.6% from its recent peak as of last Friday. Investors became progressively more nervous during this period, with some measures of investor sentiment falling to levels not seen since mid-March, even though market indexes were at least 25% higher. Green shoots became brown weeds, and people again fretted over the speed and timing of an economic recovery. Several downbeat economic reports contributed to this feeling, and worries over earnings season, which began last week, added to the malaise.

Make up whatever reasons you want, the market just doesn't go up (or down) in a straight line. After a nearly +50% jump in just 12 weeks, stocks were due for a breather. A decline of 5–10% should have been expected. And that is the main reason I have been holding off investing cash and rebalancing portfolios recently, waiting for the correction to end, as I feel confident it will. And although it’s too early to know for sure, I suspect the end came yesterday, when the S&P 500 rose over +2% and erased its losses from the prior week.

Today, stocks edged up again, and after-hours action suggests another positive day tomorrow. The NASDAQ 100, for example, is up nearly +1.5% this evening, largely because of Intel’s positive earnings surprise. After the market closed today, the tech bellwether reported earnings and sales well above expectations; in fact, sales for the quarter were over $700 million more than analysts anticipated, and the company expects continued improvement in the third quarter. Intel stock is, not surprisingly, up over +7% after hours.

Yesterday’s powerful rally was ostensibly driven by the comments of Meredith Whitney, a prominent bank analyst who made a name last year by predicting hard times for banks. Far from her usual doom and gloom, yesterday she said that banks’ and other financials’ earnings in the second quarter would likely be much stronger than expected; Goldman Sachs’ announcement this morning that their earnings were +42% above expectations certainly added support to that view. Maybe the shoots are green after all.

Not surprisingly, the recently-ended second quarter of 2009 was one of the strongest for stocks in history, with the MSCI ACWI up +22.3% during those 3 months. Large numbers of investors who sold out of stocks in fear and disgust during February and early March ended up missing a history-making rally. These recent results are all the more impressive when you realize that the last time we had a positive quarter for stocks was way back in the third quarter of 2007 (when the MSCI ACWI was up only +3.5%)! It’s certainly been a long and horrific bear market!

But today I’m going to make three heretical statements, the kind I’ve been loath to make for well over a year now. Here are two predictions for the stock market and one for the economy:
1. The bear market that began on November 1, 2007 ended on March 9, 2009. Furthermore, the lows of that day will never be seen again (ever).
2. Stocks will continue to rise (in their usual irregular fashion) throughout this year and next. The MSCI ACWI will end 2009 at least +26% higher than today. 2010 should see another increase of +20% or more.
3. The recession that began in December 2007 is already over (at least as measured by changes in GDP). US GDP bottomed no later than June 2009. (We won’t know this “officially” until at least September.)

Many people will undoubtedly argue with me on these predictions, as well they should. But rather than giving me reasons why I might be wrong (or right), let’s just put these away until December 31 and see how I did.

Given the state of the markets and the economy right now, I think it’s finally time to buy stocks again. Those of you who have received your updated portfolios will start seeing trades in your accounts very shortly. Those who have not yet received your rebalanced portfolios will get them very soon. I wish I could do them all at once by computer, but because every client portfolio is a little different, and because I use a unique industry and country weighting approach, there is no software available that will do the trick (including those costing $100,000 or more). At some point, I hope to develop custom software to handle rebalancing; in the meantime, I will continue to use Excel and a lot of time and sweat!