Overall there is probably too much focus on the short-term outlook for the stock market right now in our view.  While we may experience a correction in the near term, those are normal in any advance.  The more important decision to make is what we believe will be the direction of the stock market over the next few years. On that count we remain bullish.  Corporate profits are now within 10% of their prior peaks and are still growing at double-digit rates, meaning that profits will most likely be back at record levels by the end of 2011.  If profits are back at their old highs, then there’s no reason to think that the stock market would not be back at its old high as well.  A trip back up to the high for the Canadian set back in June of 2008 would mean an 11% rise from current levels.  In the US, getting back to the October 2007 high for the S&P500 would take the market higher by over 21%! But even beyond that, the background for stocks still looks attractive.  Low interest rates, strong global economic growth, improving corporate profits and continued skepticism from many investors could set the stage for a multi-year advance in stocks not unlike what was seen in prior times after stocks went through a series of bear markets over a decade.  Looking at the chart below of the S&P500 since the beginning of the last century we can see three clear periods of extended growth and strong stock market gains.   Stocks started the 1900s with a bull market that last through the First World War right through to the end of the 1920s.  That was a period of economic industrialization in the US which included the construction of the major railroads as well as the invention and commercialization of the automobile.  Following the stock market crash in 1929, stocks and the economy remained in a depression right through to the Second World War.  Following that they went into an expansion that lasted 26 years that coincided with a major expansion of the industrial base of the US as soldiers returned from the War and built factories and homes.

The onset of the Vietnam War and the oil price shock of the early 1970’s brought that period of prosperity for stocks and the economy to an end as inflation was driven up to double-digit levels and ultimately ended in two recession and two bear markets in less than ten years (1973-74 and 1980-81).   Then the economy and the market emerged once again and went into another long-term period of prosperity that included the global expansion of US consumer brands, the dominance of the US banking system and finally the technology revolution that came to a crashing end when the bubble in technology stocks collapsed in 2000-01.  After ten years of sideways stock markets, two recessions and a financial crisis that almost brought down the US banking system, the economy seems to have once again found its footing.  It now looks to be lead higher by the rapid expansion of the emerging economies of the world.  This process could easily last another 10-20 years as these economies industrialize and their consumers gain more global spending power.  We could be on the verge of another multi-year period of growth for global stock markets supported by low interest rates, productivity growth and corporate profit gains.

One of the winning sectors in this environment will continue to be the commodity producers as the global growth will test the limits of productive capacity of many basic resources.  Canada will do exceptionally well in this environment as we have the resources that the world will continue to need.  Russia, under a more stable and less corrupt political system, will do well in this environment, as will Brazil, with an exceptionally strong resource base and massive consumer base.  China and India should continue to lead the industrial growth due to lower labour costs and an expanded industrial base.

Another stock sector that should do quite well in this period of growth will be the large technology stocks.  Flush with cash, high profit margins, known brands and a global footprint for sales, they are exceptionally well positioned to supply the productivity enhancement tools and consumer goods that the world will need.  Most importantly though, these stocks are now exceptionally cheap relative to their potential growth rates and earnings.  Ten years ago, at the top of the dot-com bubble, public companies reported huge earnings, but they were hemorrhaging cash at a rate of $125 billion annually.  Today U.S. companies are generating gross cash of $250 billion, according to the most recent 2009 figures. With so much free cash flow, companies are better able to return money to shareholders via dividends or share buybacks.  Stocks will always be volatile and the risk of a correction in prices from some outside event or just normal profit taking always exists.  But you might not want to risk being on the sidelines watching one of the best opportunities for longer-term investment pass you by.

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