Is the Bull Market Over? Or Just Beginning?

As you know, both S&P 500 and Dow Jones (but not the Nasdaq) are within striking distance of all-time highs.  So a natural question arises: Is the 13-year-old secular bear market that started in 2000 coming to an end?  Or, rather, is this a precursor to a market collapse that happened in 2000 and 2007, when previous peaks were reached?

Of course, only the time will tell the answer, but there are reasons to be optimistic.  From a historical perspective, reaching a previous peak after years of sideways movement could be a precursor to reaching new highs.  In the previous secular bear market, after 1973, it took Dow almost 10 years to reach its previous peak of 1051 in 1982.  In the bull market that followed, Dow rose nearly 15-fold.  But history aside, there are actual economic reasons to be optimistic:

• Company earnings continue to rise.  Just this past quarter, earnings rose 7.3% compared to 1.9% that analysts expected.  Meanwhile, P/E ratios remain very reasonable.
• Investors remain cautious.  Major publications remain skeptical of the rally.
• Central banks around the world keep pumping liquidity into markets.
• International situation is showing signs of improvement, from Chinese recovery to apparent stabilization of European debt crisis.
• There is a good chance that U.S. will reach energy independence in the next several years.
• Housing market recovery appears to be real.

Unlike equities, the last decade has been great for bonds which have benefited from declining interest rates.  Investors contributed to this trend by taking cash out of stocks and injecting $1 trillion into bond funds.  For the first time in years, this trend reversed this January, when stock funds saw $35 billion inflow.  That is still a trickle compared to $1 trillion, but some argue that the Great Rotation out of bonds into stocks has begun.  If so, stocks do have a long way to run.  History will tell.