Stocks Rebound Strong, But Will it Continue?

The Second Quarter of 2009 most likely marked the beginning of the next bull market and the first increase in the stock market since 2007. US stocks, as measured by the S&P 500, were up nearly 16% for the quarter and up nearly 37% since the market low on March 9th. However, it will take three more rallies of this amount to regain the market peak reached in 2007. 

While we may be nearing the end of this recession, don’t expect things to get back to “normal” quickly. The US and international developed markets are likely to grow much more slowly in the coming years than over the past decade. Aging populations, increasing savings rates, high unemployment rates and the deleveraging of both corporations and individuals are likely to keep GDP (Gross Domestic Product) growth lower than during previous recoveries. In addition, the massive debt piled up by the US along with likely higher taxes in the future will slow growth for the foreseeable horizon.

With a slower U.S. economy, the U.S. stock market is likely to advance at a slower pace than in the recent past. From 1990 to 2007, GDP grew at an average rate of 2.8%. During the same period, the S&P 500 expanded at an annual rate of 7.5%, a 4.7% premium over GDP. If the average GDP growth for next several years falls between 1% and 2% as predicted by some observers including PIMCO’s Bill Gross, expect average US stock market returns to average only 5.5% to 6.5% in the coming years.

However, significant growth in US companies may occur in particular sectors. These sectors are likely to be the industrial sector, high tech, renewable energy and clean technologies, natural resources and the beaten down financial services. Internationally, we expect emerging market countries to continue to outperform developed markets.