The Obama bull market is here!

Posted by Shyam Moondra

The stock market has gone up over 20% since it hit the bottom in early March. As a rule of thumb, that's considered the beginning of a bull market and not a bear-market rally as some analysts suggest. While 20% gain in less than a month may seem excessive, this up move should be viewed in conjunction with the excessive market decline of over 55% from the peak set in October of 2007. During most of 2008, the market behaved as if the sky was going to fall and we will have a repeat of the depression of the 1930's, which never materialized. In essence, during 2008, the market was besieged with fear and it simply overreacted.

It's hard to not stipulate a bullish scenario for the stocks in coming weeks and months, given the following government actions and market trends:

1. The monetary policy is the most expansive we have witnessed in decades. The money supply is growing at a rapid clip and interest rates are the lowest we have seen in recent history. The bountiful money will unquestionably expand the economy.
2. The Obama administration's aggressive policies on the fiscal front are also positive for the economy. The stimulus package and the proposed budget plan include lower taxes for the middle class and significant increases in government expenditures. These actions will create new jobs, revitalize the sagging construction industry, and increase consumer confidence. Because of the provisions in the stimulus package and the budget, we can expect a reduced rate of home foreclosures and increased rate of home buying, made possible by tax credits for home purchases, attractive home prices and the lowest mortgage rates ever (stimulating refinance market which puts more money in the pockets of homeowners). The latest monthly housing report showed an increase in the home sales for the first time in months, which confirms that we may have hit the bottom in the housing sector.
3. The credit market is stabilizing and we will see a continued improvement in that area in the coming weeks and months. The TARP, FED's credit-window facilities, and the proposed $1 trillion plan to remove the toxic assets from the books of the banks will steadily bring normalcy to the financial markets. The fear of systemic failure of the financial system, which sunk the markets by 55%, is behind us, and, therefore, it's natural for the market to recover a big chunk of that loss in the short-run. The recent signs of stabilization in the housing sector bodes well for these toxic mortgage-based securities to start appreciating in value and thus help speed up the process of normalization in the credit market.
4. Consumer confidence seems to be gaining, as is evident from the recent data on retail sales. The consumers are already seeing a slight increase in their paychecks, thanks to the stimulus package; more money in consumers' pocket will boost their confidence in coming months and they will start spending again.

President Obama deserves credit for providing strong leadership on all fronts; his plans are intellectually well thought out and he is attacking the problems through a multi-pronged approach that will bear the fruits sooner than many critics think. For the first time since the Clinton presidency, it is becoming clear that a smart and a strong leader can indeed make a big difference.

Of course, things are not going to go up in a straight line. We will have some hiccups along the way, but the die is cast and we are on our way to renewed prosperity again. The biggest issue in my mind is the rekindling of inflation. As the economy becomes stronger, we will see a spike in commodity prices. Easy money and sharply increased government expenditures will set the stage for inflationary spiral. Therefore, the next challenge for the FED will be to manage interest rates in a way so as to ensure continued economic expansion while keeping inflationary expectations in check. That means the interest rates will have to start going up gradually beginning in 2010. The Obama administration will also have to come up with a plan to address the bulging budget deficits and ballooning national debt. Decreasing government expenditures (e.g., eliminating waste and contracting abuses in the defense department) and increasing taxes on the super rich and closing down corporate tax loopholes (when companies like Goldman Sachs that use their offshore subsidiaries in tax-haven territories to escape taxes and pay only 10% in taxes, they unfairly put the tax burden on the American people).

I believe the stock market is slated to recover at least half of the losses incurred in 2008 rather quickly, which will bring the Dow Jones Industrial Average to around 10,000 by the end of this year. Further gains in 2010 and beyond will depend on how skillfully the FED manages the interest rates and money supply and how successful President Obama is in bringing down the budget deficit. By the end of President Obama's second term, it's not inconceivable to see Dow Jones Industrial Average of 18,000.

For the rest of the year, there are plenty of attractive investment opportunities. The technology sector has been lagging and thus could do well in the coming months (HP, GOOG, AMZN, AAPL, RIMM, BIDU, IBM, MSFT, CSCO, etc.). The financial sector has been beaten down sharply, so it will recover just as fast (JPM, WFC, BAC, C, etc.). Some of the other industrial companies that look very attractive are MON, CAT, CMI, FDX, UPS, AA, CE, DOW, BA, HON, GE, MMM, VFC, TJX, etc. (Disclosure: The blogger owns most of these stocks).