Can This Bull Market Keep Bouncing Back?

If there’s anything this bull market has mastered, it’s sidestepping stumbling blocks. A spring retreat took 7% off Standard & Poor’s 500-stock index in May and June, as the U.S. economy hit a soft patch and the sovereign debt crisis in Europe narrowly averted a Greek tragedy. Stocks regrouped before the market could log an official “correction,” typically defined as a loss of 10% to 20%. According to InvesTech Research, the bull market that began in March 2009 has experienced eight dips of at least 5%, more than any bull market in the past 73 years.

Can the market keep bouncing back? It’s a fair question, given the obstacles still to be negotiated—starting with the Labor Department’s report that employers hired heartbreakingly few workers in June, pushing the unemployment rate to 9.2%, the highest since December. Then there’s the stagnant housing market, Uncle Sam’s scary debt burden and the still-simmering debt crisis abroad.

But there are also many positives likely to propel the bull market, even if it is in fits and starts. The reporting season for second-quarter earnings got off to a strong start, with U.S. corporations on track to deliver respectable gains despite grappling with the spring slowdown here, supply disruptions in Japan and higher materials costs. Profit margins are high but not peaking, balance sheets are stuffed with cash, and world trade is strong, with U.S. exporters catering to a rising middle class in emerging markets. Retail sales show a remarkably resilient consumer.

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Unemployment remains a sticking point. “It’s disappointing we’re not getting job growth,” says MFS chief investment strategist James Swanson. The pickup in corporate spending on plants and equipment will eventually translate into hiring, and this painfully slow expansion has one advantage, says Swanson: “It’s better than in the 1990s, when more of the growth was fueled by credit.”

Swanson figures we’re “smack-dab in the middle” of this cycle of economic growth, judging from the average 58-month duration of expansions since 1945. The bull market, too, is hardly ancient at 28 months old. The average rally since 1932 has lasted 45 months. The S&P has doubled; the average gain is 136%. Analysts at Birinyi Associates, a research firm in Greenwich, Conn., believe we’re moving into phase three of a four-phase bull market that will carry the S&P 500 above 1,500 (from about 1,340 recently, or at least 12% higher) over the next year, and will ultimately take the S&P to 2,000-plus.

Rather than focusing on indexes, investors should consider an old adage: It’s not a stock market, but a market of stocks. Selection is key. So far this year, 50% of the stocks in the S&P 500 have gained more than the index itself, Birinyi points out. The average gain of those outperformers is 20%, compared with just 6.8% for the index (indicating that the biggest, most dominant stocks in the index have lagged). Not a stock picker? Another way to get to the winners is to buy shares in an equal-weighted S&P index fund, such as Rydex S&P 500 Equal Weight ETF (symbol RSP), where the movements of all of the stocks in the index count the same.