U.S. market wary amid optimism after one year of bull run

Both fear and ecstasy have been lingering since the first day when the U.S. stocks embarked on the strongest rally in more than seven decades. One year later, uncertainty remains as investors try to see where the market is heading next.

UNPRECEDENTED BULL RUN

Tuesday has been quiet, with trading volumes light and major indexes moving in a narrow range. Still, in the past 12 months, Dow average recovered more than 61 percent, S&P gained 68 percent, while Nasdaq rallied about 84 percent. It has been the biggest bull run since the 1930s.

No doubt fear and pessimism were in control when the equity market was battered on March 9, 2009, with S&P 500 hitting the lowest closing since September 1996, or 57 percent down from the market peak reached in October 2007. Also on the panic-stricken Monday, Dow closed at 6,547, less than half of its peak level of above 14,000 in 2007.

But the turning point came in the following day, when Citigroup, the most wounded major bank in the credit crisis which had become government-controlled in return for rescue loans, reported a surprising profit.

Despite doubts on the validity and sustainability of an upward trend, equities embarked on a continuous rally that lasted 11 months until Dow reached 10,725 on Jan. 19 this year. It took the stocks most of February to recover the 9-percent sell-off in late January, and now all major indexes have managed to be up for the year.

The hardest-hit financials rebounded most among all sectors, up nearly 130 percent in a year. As of Tuesday's closing price, Citigroup, whose shares once broke one dollar for the first time in history, gained more than 260 percent. Bank of America, another seriously injured major bank, rallied 340 percent to be the best performer among Dow components. The once-largest-insurer American International Group jumped 368 percent.

Following the financials are conglomerates and industrial goods that have logged biggest gains. Meanwhile, telecom stocks have seen least volatility due to a relatively weak recovery of about 26 percent. The sector had lost more than 50 percent amid bear bottom.

RALLY OR RETREAT AHEAD?

For the whole month of February, dollar, equity and commodities all moved higher, which is rare. U.S. economy's strong growth in the fourth quarter last year boosted investors' optimism, overshadowing the sovereign debt problems in Europe and concerns about the exit plans of the central banks.

The equity market has expressed signs of more confidence through recovering dividends, increasing stocks buybacks and merger deals among corporations. According to S&P's Howard Silverblatt, February was the best month for dividends in two years with 47 companies in the Standard & Poor's 500 index either boosting or starting to pay a dividend, and just one company, Tesoro, cutting its payout. While buying back own stocks may be the best way for companies to show self-confidence, rising acquisition activities demonstrated a bigger appetite for risk.

The sovereign debt crisis in Europe, especially Greece, has been pressuring on market. However, most Wall Street analysts don' t expect the debt concern to derail the world financial market. Citi equity strategists continue to look for a roughly 30-percent rebound in earnings per share (EPS) in 2010, allowing global equities to grind higher.

"As equity valuations look reasonable, they should provide some protection against further disappointments," wrote Robert Buckland, chief global equity strategist of Citigroup, in the bank's latest Global Economic Outlook and Strategy.

Buckland said global equities currently trade on a trailing price to book of 1.8x, well below the 3x reached before the Asian crisis and the 2.7x reached before the recent financial crisis. " Indeed, current levels are even well below the 2.1x reached before the Mexican crisis in 1995," he pointed out.

JPMorgan and Credit Suisse also expressed optimism on the mid- to long-term prospect of the equity market and suggested to buy the dip.

RECOVERY CHALLENGES

But, the equity market's strength lies in the hope of a sustained economic recovery. Buckland warned that if Citi economists were to downgrade their global view to a "double dip," as a result of contagion set off by the recent sovereign debt crisis, then he would "suspect that our EPS forecasts are too optimistic and even our 'grind higher' view on global equities will prove too bullish."

For the U.S. economy, the biggest worry is the job market. The February report comforted investors with a surprising drop in job losses and with the unemployment rate held steady at 9.7 percent. But worries will persist until the government report suggests an uptick trend in labor market. High jobless rate pressured on the public and U.S. consumers' confidence plunged sharply after a ten- month rising streak. Consumers still hold tight to their wallets and banks continue to suffer from bad consumer loans and mortgages.

The housing market is yet to revive as many analysts predict a further price drop. Latest pending home sale data suggested weakness in the housing market. According to the National Association of Realtors, the number of contracts to buy previously owned U.S. homes fell 7.6 percent after a revised 0.8-percent increase in December. Economists had expected an increase of one percent.

Investors are also seeking real pickup in consumer demand from corporate earning results for the first quarter this year that will be issued next month. Companies reported better-than-expected earnings for the last three months in 2009, but most through cost and inventory cutting.

Analysts believe that stocks will trade sideways before more clear signs of economic recovery pour in. And while the equity market will still maintain a positive trend as a whole, investors should be selective about what they may buy.