We have just gone through one of the most painful bear markets in history. The question on everyone’s mind is when will the markets rally? As I offer some comments, keep in mind that I am not an economist, futurist, nor market analyst. Take my opinions for what they are worth.

As I look into the future of the markets, consider some of my thoughts:

1. Statistically speaking. In some of my previous articles, I have talked about market statistics. Markets go up more often than they go down. In fact, markets go up 75% of the time and they only go down 25% of the time. The bear market that we have gone through is one of the worst ever, both in terms of how much the markets have dropped but also in terms of how long markets have stayed down. Statistically, the probabilities continue to swing in favor of a market rebound into the next bull market. The worse things get the higher the probability of market recovery.
2. Governments are doing their part. Obviously it is in the government’s best interest to employ economic policies to try to get markets and the economy in the right direction. Governments are doing their part by lowering interest rates, reducing taxes, and employing other stimulus policies. Economically, information is starting to improve.
3. Corporations are also doing their part. The markets continue to be ultra-sensitive to corporate earnings. Corporate earnings have become the benchmark measure for market movements. When you have strong corporate earnings information, markets move up and the opposite is true when earnings information is not so great. Corporate earnings are really a function of revenues fewer expenses. With the slowdown in the economy, corporations have had to face reduced reductions in revenue. As a result, these same corporations have had to respond by trying to cut expenses. Layoffs, mergers, acquisitions, downsizing, and cost-cutting are all catchwords in the corporate arena. Corporate earnings are improving but nowhere near the growth levels, we experience in the last bull phase of the markets.
4. Investor Confidence. Investor confidence is at extreme lows. All you have to do is ask yourself if you are happy about your investments. Most investors are disappointed with their investment performance and why not? Markets have been anything but generous. One of the charts to measure investor confidence is the amount of cash sitting on the sidelines. I recently saw a chart offered by Franklin Templeton Mutual funds showing that our cash levels were at all-time highs. Consider that all the best selling mutual funds last year were money market funds and that money markets accounted for almost 60% of all mutual fund sales. To apply some perspective, money markets in the year 2000 accounted for only 3.5% of all mutual fund sales. Money market sales grew by over 2000% (that is not a typo) in 2001. Over the past 20 months, investors have been putting money into money markets with a ‘wait to see’ mentality. As soon as confidence improves and investors start to move money out of money markets into equity markets, this could be the final boost we need for a sustained market rally.
5. Event risk. Event risk like the September 11^th fiasco is still a possibility. The event risk is awful. However, the good news is event risk typically has a short-lived effect on the markets. Event risk typically creates panic and uncertainty in the short term. However, remember that markets in the longer-term move because of economics and fundamentals.

Trying to predict where markets are going is the most difficult thing to do. Someone recently reminded me that it is not about timing the markets but time in the markets that counts. Looking at economic data and market statistics is a guide to help us formulate opinions but unfortunately, everyone has a different opinion.

As much as I think we are in one of the greatest buying opportunities we have seen in a long time, the reality is anything can happen. Stick to good investment principles like diversification, patience and risk management and not only will you overcome painful bear markets but you will benefit from the coming of the next bull market.