Top 5 Bull And Bear Arguments

By Ryan Barnes | August 10, 2009 AAA
Top 5 Bull And Bear Arguments

The debate between bullish and bearish investors never really dies. One side's army may gain more soldiers now and then, but the fight itself is an essential part of seeking efficient markets.

It's also prone to a lot of reverse psychology; when the S&P bottomed out on March 5 of this year, hardly a bull could be found. Bears ruled the street. But it was on that very day that being bullish was the most profitable venture going. From the lows, the S&P 500 has rallied 50% in the sharpest five-month increase in over 60 years.

Such is the nature of the debate; bullish sentiment has a habit of peaking when stocks are at high levels and vice versa. In the spirit of advancing the debate in our present day, here are the top five arguments being used by the bulls and bears as we approach the second half of 2009 and market indexes sit at their highs of the year.

Roar, Baby Roar: Top 5 Bull Arguments:

#1 - The economy has stabilized, and we are likely to see positive GDP growth in the second half of 2009.
This argument is the most important from a medium to long-term perspective. If the economy doesn't show growth in coming years, there simply won't be any support for higher stock prices. Gross Domestic Product (GDP), for all its flaws, is still our best single measure of the overall health of the economy.

After falling at a 6.4% annual rate in Q1, GDP fell only 1% in Q2 and most economists are predicting a return to positive growth in the second half of the year.

#2 - Cost-cutting measures at companies are leading to higher margins.
Companies are squeezing inefficiencies out of their business models in any way they can, proving the old adage true that "necessity is the mother of invention."

#3 - 75% of companies in the S&P have beaten estimates in Q2.
Largely due to the reason above, three-quarters of the S&P 500 firms have beaten analysts' estimates in Q2. Granted, estimates called for a 34% drop in profits from 2008, but a beat is a beat, so the bulls say. Analysts are now ratcheting up estimates for the back half of the year, and more earnings means higher stock prices can be supported at the same valuation (P/E) level.

#4 - The causes of our recession - housing and financials - have turned a corner.
Spoiler alert - you'll see this argument in reverse on the bear side. The truth is that folks can look at this argument either way. Bulls point to a recent uptick in new home sales and prices that have stopped declining, even rising in some geographic regions.

Banks, meanwhile, have come back from the edge of the abyss, with some even repaying their TARP loans from the U.S. government. A steep yield curve is helping banks earn a lot of money in interest, and this should help them to finish paying back the U.S. taxpayer in coming quarters.

#5 - Emerging economies will continue to grow.
Countries like India, China and Brazil are seeing strong GDP growth this year, and over half of the S&P 500's earnings come from overseas. As long as the U.S. can continue to be the global leader in innovation, we can export products and services to the rest of the world while we wait for our domestic economy to fully heal.

Cower, Baby, Cower: Top 5 Bear Arguments:

#1 - There is more pain to come in the housing market.
Bears say there is "shadow inventory" of foreclosed and unsold homes being held at banks, and it will flood the market as soon as prices stabilize. Therefore housing prices will either slide again or stay at low levels for a long time.

#2 - Commercial real estate is a crisis-in-waiting.
With vacancy rates at multi-year highs at office high-rises and shopping centers, commercial real estate may soon suffer the same fate as the residential housing market. The commercial real estate market is large enough to arrest any economic recovery in its tracks by striking a new blow to financial institutions. (From lenders to buyers to hedge funds, it appears everyone has blood on their hands. Read Who Is To Blame For The Subprime Crisis?)

#3 - High budget deficits and future spending commitments will threaten the U.S. dollar and our ability to grow out of this recession.
If the U.S. government loses its ability to borrow at relatively cheap rates (the 10-year Treasury is still at historically low yield levels), we are in for big, big problems. We need our foreign investors to continue to trust the greenback and our government's ability to run a tight budgetary ship.

Legislation initiatives on healthcare and energy will add to the budget deficit today with no promise for future savings, so say the bears.

#4 - Unemployment will continue to rise.
Because consumer spending makes up 70% of our GDP, we need a healthy spender and that means a working consumer. Until we can grow new jobs in this country, any short-term bounce in stocks is bound to falter without strong demand from the end spender.

#5 - Banks aren't lending.
Bears say the banks aren't lending enough to spur a recovery. We need banks to open up credit lines to individuals and businesses again, and many have been hoarding cash in order to preserve their own balance sheets. Until money flows to those who need it most - people who can create jobs and buy goods - there won't be a recovery large enough to support the recent rise in stock prices.

The Bottom Line
Who wins the debate today? I leave that decision to you. All I can suggest is that, whatever your current investment beliefs are, make sure that you know and resonate with the reasons why. For investors with a long time horizon, just remember that the U.S. has seen many crises in the past. We have always recovered, and that may be the surest bet of all. (For more reading, check out Digging Deeper into Bull and Bear Markets).

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