Beware the Mass Media's Bull Market

BOSTON – The last time I woke on a Monday to see the talking heads on "Good Morning America" discussing how the stock market was nearing its high and whether it was time to invest, the bull market of the 1990s was at its frothy peak.

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So when it happened again this week, it raised a number of concerns.

The mass media only seem to recognize a bull market when the bulk of the stampede has passed, typically encouraging investors to run with the bulls only when the next person stepping into the fray is awfully close to the horns.

Investors who were burned by the market downturn that started in 2000 remain skittish — in a natural, once-bitten, twice-shy mode. They see a report like the one on Monday's morning news as a positive sign rather than a cautionary one.

So while experts try to determine whether the market can break through to new highs and hold those higher levels, investors have to decide if the sense of déjà vu they get from a report like the one I saw should worry them.

For starters, however, investors still need to come to grips with the idea that what they have seen actually has been a bull market.

Consider the following:

Over the past three years — since most of the market indexes hit lows in March 2003 over concerns about the possible invasion of Iraq — the Standard & Poor's Small Cap 600 Index is up roughly 30% per year, or 120% overall. The large-cap S&P 500 is up 19% on an annualized average basis (almost 70% overall), with the S&P MidCap 400 up about 27% annually.

Even the Nasdaq Composite — the index that was shredded most heavily during the bear market, and the one big index that remains years away from recapturing historic highs — is up more than 80% since 2003.

"The last three years has been a bull market that stands up against any one in history," says Craig Callahan, president of Icon Advisors in Denver.

"Unlike the last bull market, where you had high growth and low earnings, you have real earnings and profits for companies," Callahan continues. "Even in sectors that have soared — like energy stocks — earnings have grown so much that prices are still below their real value."

Bull markets typically don't end until things are extremely overvalued, so, while it is easy to find experts to counter Callahan and urge caution, no one is suggesting that the burgeoning enthusiasm that typically grips the market as it nears new highs is completely misplaced.

The problem for investors, however, is less what is happening in the market than what is going through their own minds.

That three-year recovery hasn't felt too great precisely because it is a rebound. While the fast-growth '90s were euphoric, the current bounce-back is sedate.

Investors have experienced it more as clawing back, or a recapturing of lost ground, especially for the many who were invested heavily in the tech-laden Nasdaq.

"The danger lies in people not realizing that the stock market has come back because they don't feel like their own portfolio has come back," says Dr. Richard Geist, president of the Institute of Psychology and Investing in Newton, Mass. "Unlike the late 1990s, this doesn't feel like progress, so they're waiting and waiting and waiting to put money back to work, and the real danger is that they wait for some sign — like that news report — and they wind up getting in late."

Geist believes the market is due for a pullback, he says, and expects to see investors warming up to the idea of plowing money in just before that break in the action.

Still, he notes, "it is always a good time to invest, so long as you are not putting everything into high-flying stocks that have come up significantly over the last three years. The idea is still to spread your money around."

For many investors, the pain of the bear market was compounded by a lack of diversification. As they plowed money into hot stocks, they avoided asset classes like real estate, which wound up being the stellar investment category of the bear market.

"Whenever you get this rhetoric about how great the equity market has been, you need to be skeptical," says Les Nanberg of Cornerstone Wealth Management in Boston. "Historically, people only want to buy something that has already gone up, so when the equity market has done well, people think it must continue."

Ultimately, if you are part of the crowd that "Good Morning America" was reaching out to — people who wonder if it's time to invest — the real question may be, "Why haven't you been invested?"

While there are investors and savers who stay in hot sectors and move money around — and who have profited tremendously from concentrating in real estate and energy over the past few years — the typical consumer needs to tune out the talking heads and the noise and come up with a strategy that is sensible in all market conditions.

At a bare minimum, that means having a diversified strategy for the core of personal investment holdings, and then moving money around the edges as dictated by the market.

Says Geist: "Someone who is just getting comfortable with the market now has already missed out on a lot.

"If they jump in now, they need to make sure they won't just jump out again when the market retreats — because it will pull back at some point — and they need to be realistic. If they are just realizing now that the market, by most measures, is nearing all-time highs again, they should also understand that, while the market may keep going up, it most likely will be at a slower pace than we have seen over the last three years."

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