The Stealth Bull Market

The Tree Grew, but Who Was Watching? 
It's been some kind of ride. Since March 2009, U.S. stocks as measured by Morningstar's U.S. Market Index are up 23.9% annualized. For comparison's sake, the Great Bull Market of the '80s, measured from January 1982 through the peak at July 1987, also registered at 23.9% per annum. Yes, the earlier bull market was longer than this one has been (so far); thus, its cumulative returns were greater. But in real terms, the '80s' bull market was actually less roaring than the current version, given the earlier period's higher rate of inflation.

Randall Forsyth touches on some of the effects of this stock explosion in this week’s Barron’s. As Randall points out, the top 1% of Americans controlled 35% of total household wealth and 42% of financial wealth in 2010 (presumably, the last time that these figures were comprehensively collected). Those percentages have certainly increased since then, probably sharply, because all the action has been in the stock market. (Yes, there's been good money in bonds, too, but nowhere near at the level of stocks, plus bondholders tend to be much the same demographic.) Housing prices have gone nowhere since then, and of course there has been little wealth creation through increases in employment and salaries.

The Barron’s column credits/blames the stock surge on the Federal Reserve's policies, in particular the so-called program of QE2, or Quantitative Easing 2, which has had the Fed purchasing large amounts of Treasuries since late 2010. It is generally a perilous task to link market movements to Fed actions, and this would seem no exception, as the stock surge is by no means a U.S.-only phenomenon.  The rest of the world hasn't been far behind the States' gains. The Morgan Stanley All World Index ex U.S. (now there's an awkward name) is up 17.8% per annum since March 2009, for example. Also, if it's so clear now that quantitative easing has inflated stock prices, why wasn't it clear in 2010?

I think the rally's explanation is a lot simpler. Stocks were cheap in 2009, based on various measures such as normalized earnings, revenues, book value, and so on. Earnings growth has been terrific since then, so that despite the great run, stocks on an earnings basis are trading close to their levels of four years past. With inflation and interest rates remaining low, it's difficult to see why stocks would be priced much less than they are. Despite its big gains, this rally feels more matter-of-fact than bubbly. If it is a bubble, it's the quietest bubble that I can recall!

Tough Crowd
My Morningstar compatriots had little sympathy for Wally Weitz's travails with  Weitz Value (WVALX), as mentioned in The Wall Street Journal (subscription required) and in my column last week. They like the fund fine, as evidenced by a Morningstar Analyst Rating of Silver (the second highest in the system). But a 1.2% expense ratio on a $1.1 billion fund, they point out, is old school. The fund industry used to permit that sort of pricing: If a manager had a good long-term record and would beat the S&P 500 over frequent long rolling periods, as Weitz Value has done over the years, nobody would complain. But as my column stated, the pricing model has changed. In today's reality, those margins don't fly unless the fund has an absolutely dominant record.

Does Transparency Matter With ETFs?
I also ran another bit of news by the staff. State Street has filed to run three actively managed exchange-traded funds that would bypass the usual portfolio transparency offered by ETFs, so that the funds' portfolios could not be seen on an ongoing basis. (This would occur through some sort of "blind trust" arrangement, which means about as much to me as it probably does to you.) I thought that might elicit concern. Nope, just yawns. In their view, ETFs and mutual funds occupy essentially the same turf, competing against each other for similar (if not identical) assets, and of course mutual funds routinely operate by not revealing their portfolios. To them, these would be just mutual funds in ETF clothing, so there's no reason to get up in arms about the lost transparency. If the funds offer enough performance and an attractive cost, they will get purchased. If they don't, they won't.

The Rebellion Starts Here
Lucy Kellaway of Financial Times (registration required) offers mock suggestions for improving the work environment. (All right, partially mock; I think she's partially serious, too.) Among her ideas are to ban all work emails sent between 8:30 p.m. and 8 a.m.; to eliminate business breakfasts; and, while we're at it, to dump business dinners, too.

Those all work for me. (Too bad I'm breaking all three of those proposed rules this week. But next week will be different, I swear!) One additional idea, Lucy--no CEO speeches.* At any time, for any reason, under any conditions. 

* This guy being the exception. Come on, Joe, you know that I didn't mean you. 

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.