One Year After Equities Hit Bottom, Where to Next?

There's an anniversary worth noting this week: The greatest stock market mauling since people listened to music on gramophones finally hit bottom a year ago Tuesday. Not to be too "glass half empty" about it, but one way to look at March 9, 2009, is the day on which the last of the shellshocked sellers -- perhaps their professional careers or retirement plans aflame -- finally cut their losses and sold.

Did that ever turn out to be a mistake. True, the U.S. market has been a lousy investment for a decade, and in hindsight it's easy to see that at this time last year stocks were priced for some kind of Mad Max Beyond Thunderdome future. But that really was an epic, classic rally. The last became first (financials), the early cyclicals soared (tech and consumer discretionary) and small-cap stocks left the blue chips wallowing in their wake.

One year later, the Dow Jones Industrial Average ($INDU) finds itself back above 10,500, good for a gain of more than 60%. The broader S&P 500 ($INX) is up more than 68% over the same time. The tech-heavy Nasdaq Composite ($COMPX) is up more than 83%. And as for those even-riskier, lower-quality small caps? The benchmark Russell 2000 ($RUT) has nearly doubled in the last year.

Even More Uncertain Now?

Of course, after having been in free-fall for nearly a year-and-a-half, no one knew for certain last March that the bottom was blessedly here. And yet now, even with Thunderdome averted, the outlook for stocks is in some way even more uncertain. After all, the market has been stuck in a tight 10% trading range since October, struggling to square a tepid, perhaps even abortive recovery, with the powerful rebound in corporate profits.

Ed Yardeni, president of Yardeni Research, has been bullishly prescient throughout the rally, and he makes as good a case as any to be optimistic about equities. "The global economic news is a mixed bag of V's, U's, and L's," Yardeni writes. "The global earnings news, on the other hand, is uniformly V-shaped."

That's unabashedly good news, Yardeni says, since rising corporate profits should more than offset the end of stimulus from governments around the world. "That's what always happened in the past," Yardeni writes. "I am counting on the profits cycle to work its magic again this time."

Hardly an Average Time

On the other hand, let's take John Hussman, the well-regarded manager of the funds bearing his name. He has done very well for his clients over the last decade. And among the many insights in last week's semi-annual letter to shareholders, Hussman is looking to keep anything this crazy rally might have bestowed.

"Our defensive investment posture continues to be driven by concern that the present economic environment is more comparable to severe multi-year debt crises . . . than it is to previous run-of-the-mill post-war recessions," writes Hussman. "Major debt crises have rarely been resolved quickly, and while there is a clear tendency for the stock market to enjoy large recoveries from its initial losses, these advances also have typically been followed by abrupt and often steep failure."

Whatever the next move for stocks, the second year of an average rally -- if we are indeed in one -- always cools off dramatically from the first. However, these are hardly average times. A little cautious pessimism may be in order.