If there is one thing that stock investors dislike more than anything else, it is uncertainty. Unfortunately, today there exists a great degree of uncertainty which is reopening the deep wound that investors still feel from the bear market that ended in early March 2009, the second one in less than ten years and one that took the major indices down by more than fifty percent. Although many of the uncertainties noted below are real, we believe that within seven or eight percent the stock market has taken them into consideration.
Contrary to what many thought just a few months ago, one of the bright spots in the global economy is the United States. The balance sheets of many of our major corporations have never been stronger and corporate profits have surged off the bottom. Despite the fact that this has not yet been felt on Main Street, it is nonetheless a necessary precursor to a rebound in the labor market. Understandably, many are skeptical that this will transpire. However, looking back at in what order economies recover, one can see that the labor market is a lagging indicator as employers are reluctant to hire back too early in the economic cycle in fear that they will just have to lay people off again. Nonetheless, we will watch the labor market closely as the United States cannot have a sustainable economic recovery without a recovery in the labor market. Keep a close eye on Initial Claims for Unemployment Benefits as well as Continuing Claims for Unemployment Benefits which are released every Thursday and despite some improvement, remain stubbornly high.
Another concern affecting the ability of the stock market to further their fifty-plus percent gains off the March 2009 lows is continued weakness in the housing market. Home prices in major markets such as Tampa, Phoenix, as well as in many cities in California and the Midwest remain thirty to fifty percent off their peaks set during 2007. Furthermore, demand remains relatively tepid, slowing down the depletion of current inventory as well as the construction of new homes. On the bright side, ironically the sovereign debt troubles in Greece and its drag on the Euro has resulted in a stronger dollar which should help keep interest rates and therefore mortgage rates low, supporting the demand for housing which is more affordable than it has been in forty years.
A third concern negatively impacting the willingness of investors to commit capital to the stock market is the belief that the rapidly growing Chinese economy, one that helped lift the global economy out of the severe recession, is slowing thereby reducing the demand for raw materials as well as consumer goods. We agree with this assumption, although disagree to what extent it is slowing. China posted annualized gains in its Gross Domestic Product (GDP) over the past three quarter of more than ten percent. Although we are no experts regarding China, the reports we read from those who are predict that mid- to upper single-digit gains in Chinese GDP represents the “slowdown.”
There are many other concerns that are providing a headwind to our stock market, not the least of which include the negative sentiment of our voting population toward politicians, the distrust of Wall Street exacerbated by the “Flash Crash” we experienced a few weeks ago when the Dow Jones Industrial Average plummeted more than 700 points in seven minutes and our ballooning deficits, both public and private.
THE BOTTOM LINE – This period of malaise in the stock market is not without precedence and is in fact, quite normal by historical standards. Yes, it can go on for quite awhile longer. However, the longer stock investors go with little or no monetary reward, the greater that reward will be when the time comes. We are not saying that time is now. However, we are saying that at or around current levels, stocks seem relatively fairly valued, especially with Certificate of Deposit rates closer to zero than two percent and the ten year U.S. Treasury Note closer to three than four percent. Make a shopping list. Be patient and extend your intended holding period awhile.