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'I wouldn't be surprised to go 10 more years': One expert explains why the market rally is just getting started - and why he thinks stocks are 16% undervalued

Nov 18, 2019, 21:53 IST

Craig Callahan/CNBC/Youtube

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  • Craig Callahan, founder and president at the ICON Funds, thinks doubts around today's economy are translating into an undervalued stock market.
  • He also thinks that, in the absence of inflationary forces and a hawkish Federal Reserve, that the bull market can continue to run - and wouldn't be suprised if it lasted another decade.
  • Callahan thinks the consumer discretionary, technology, financials, and industrial sectors will lead markets higher going forward.
  • Click here for more BI Prime stories.

As the bull market presses on, calls for a grizzly ending for stocks have become more frequent.

It's been a wild ride so far - and those that have endured the ups and downs, the recession fears, and the trade and geopolitical tensions have been rewarded for their stoicism. Since the S&P 500 bottomed out in March of 2009, it's gone on to more than quadruple.

Although some think the bull is long in the tooth, not all are pessimistic. In fact, one money manager thinks the market's historic rally could just be getting started.

"We believe that this bull market is still intact," said Craig Callahan, founder and president at the ICON Funds, on the Money Life with Chuck Jaffe, an investing podcast. "I wouldn't be suprised to go 10 more years."

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Callahan thinks the low-and-slow economic recovery from The Great Recession is making investors overtly weary of the stock market's durability. But he says this logic is ill-founded. Fundamentally, he believes the economy is doing just fine.

"There is such doubt over this economy out there right now," he said. "We've had such rapid theme reversals these full 10 years."

That's an important note. Sentiment in this bull market has been shifting on a dime, but recent data suggests the underlying economy is continuing to chug in the right direction.

With the Financial Crisis in the recent memory of market participants, any signs of weakness have been met with a rapid exodus from equities. Meanwhile, any alleviation of potential suppressive forces have provided a reason to pile back in.

Recent examples that immediately come to mind are the on-again, off-again trade war, the Federal Reserve's late 2018 rate hike subsequently followed by three rate cuts, and the overnight selloff in the wake of the US election - which was then followed by a flat market open.

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The fickleness of investor psyche is why Callahan is seeing juicy opportunities in consumer discretionary, technology, financials, and industrial stocks. The overarching attitudes towards these sectors are extremely susceptible to shifts in narratives, while the underlying fundamentals take much longer to change.

For those interested in gaining exposure to these four areas, consider these exchange-traded funds:

But that's not the only reason Callahan thinks the bull can keep running. He also has a keen eye on the Federal Reserve.

"To me, the causes of recessions have been the Federal Reserve tightening too much because they wanted to control or bring down inflation," he said. "With inflation not in sight - very moderate - there's no need for them to tighten."

The chart below depicts personal consumption expenditures - the Fed's preferred measure of inflation - since 2006. It's spent the majority of the time below the Fed's benchmark target rate of 2% since the Financial Crisis.

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He continued: "If they don't tighten, and stay neutral, the economy can just keep chugging along."

With all of that under consideration, Callahan shares his thoughts on the market's current valuation. He's a value investor, so his analysis is based off of intrinsic value - i.e., he measures qualitative factors as well as quantitative.

"This full ten-year bull market, value has grown and increased and prices have just tried to keep up," he concluded. "Right now, for the US market, we find it to be priced about 16% below our estimate of fair value."

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