The great financial question confronting the American people lately has to do with their withered investment portfolios. After the government's huge stimulus package, there is a sense of relief that the financial crisis seems under control, but there is also a lingering suspicion that economic malaise may be here to stay, even if big outfits like the Organization for Economic Cooperation and Development say otherwise. (On Wednesday, the OECD joined the list of optimistic forecasters, saying that economic growth would return in 2010 and be better than the organization had expected just three months ago.)
And that leads to a big question about the stock market, which had run up more than 30% on the hunch that an economic upturn was imminent but has lately been exhibiting second thoughts, with trading volume sinking and major indexes slipping down through technical support levels, one after another. So investors rightly ask: Is it foolish to be buying stocks now, after the market jumped so high on hopes alone?
The good news, at least from one perspective, is that despite the market's run-up and the still soft economy, stocks remain on pretty solid ground. So says Leon Cooperman, who runs Omega Advisors, a New York City hedge fund. Cooperman spent decades guiding the investment-policy committee at Goldman Sachs; he's long been considered a tough-minded, analytical sort with savvy instincts.
Late last week Cooperman laid out his views to a packed room of securities analysts and hedge-fund managers in Manhattan. He noted the power of big federal spending and expressed concern that Washington's largesse, if unchecked, would fundamentally alter America's competitiveness. But he also made clear his view that the latest rounds of federal spending have averted crisis and set the stage for a shallow economic recovery with modest inflation. Longer term, he believes the U.S. will be growing at only 1.5% to 2% a year, well below the historical growth rate of 3%, a shortfall resulting from ongoing consumer deleveraging and frugality and slow growth in business credit.
But with interest rates remaining low, Cooperman says, the value of stocks is appealing. Indeed, whether measured against Treasury-bond yields or corporate-bond yields, he says, the stock market appears not only fairly valued but perhaps even be relatively cheap. And with the darkest hours of the financial crisis now behind us, so too, Cooperman believes, are the stock-market lows of March, not likely to be seen again anytime soon. "The lows [of this stock-market cycle] are in," he flatly told his audience. He then repeated the line with gusto, as if to jog a crowd still paralyzed with fear in the wake of the losses suffered earlier this year.
Stock-market valuation is an inexact science, and it offers no guarantee that the market will not correct sharply after its big run-up. Indeed, even Cooperman expects the months ahead to be characterized by a trading-range market, with a lot of backing and filling. But in fits and starts, he believes, it will edge higher over the next 12 months. Perhaps it's a mark of these unusual times that such a modestly bullish forecast felt bold; it's another such mark that professional investors are just as skittish about the market as the little guy.
If history is any guide, such pervasive fear isn't bad stocks have no problem climbing a wall of worry.