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NEWS - Twitter Report - Why I’m Not Jumping into this Market.
November 9, 2009
In my last piece I questioned the popular statement that the recession is over. We each wish it was over but as I write this the Dow Jones Industrial Average (DJIA) is down 200+ points. Yesterday, it was up by nearly the same amount. Lately the stock market’s had more ups and downs than the old Coney Island roller coaster with high unemployment levels and a housing surplus hanging over it like two dark clouds.
As the year closes, the stock market’s returns have been positive. As of Sept. 30, 2009, the Standard & Poor’s (S&P) 500 Index is up almost 18%, and almost 60% since March. The Dow saw its best quarter since 1998. Understandably, the questions I keep hearing are, “Should I buy stock?” and “Is this really a bull market”?
If this is a bull market, the bull is not running in a straight direction but rather zigzagging around the pen while the rest of us watch and wonder.
For example, consumer confidence is lacking and with good reason. Historically, by the time the S&P 500 rebounds 60% from its low, the confidence index hits around 92. During a recession it has averaged 72.4, and during an economic expansion, consumer confidence averages 102.0. The most recent reading puts it at 53.1 --nowhere near positive territory.
A key ingredient behind this is unemployment which is about 10%, greater in some areas and flirting with a 26-year-high. In this difficult climate people have gotten understandably conservative, saving rather than spending. Ironically, saving more and spending less would help the entire country in the long run, including our government which has to get a spiraling deficit under control, ideally without raising taxes. If it can create jobs and increase our exports the deficit will shrink and more money will be available to start small businesses – the real driver of job creation.
What’s further complicated this recession is the nearly unprecedented credit crunch. Banks, like consumers, have closed their wallets for fear of future losses. Banks however, unlike consumers are in business to lend. This becomes all the more significant to an economic rebound when combined with restricted consumer spending, which typically accounts for 70% of our gross national product (GNP). Replacing private spending/investment with public funds can help but the government cannot match the level of consumer spending and bank lending to which we’ve become accustomed plus it lays a foundation for the return of inflation.
On the positive side interest rates remain near all-time lows and energy prices, which have recently risen, have not approached outrageous levels. U.S. manufacturing activity slipped slightly to 52.6% from 52.9% in August, however any numbers above the 50% level typically indicate expansion rather than contraction. New factory orders were also off slightly in September, after four monthly increases.
As there are a lot of rough waters ahead I remain cautious. I’m not confident enough to agree that the recession is over as there are too many macro-issues needing resolution. I expect any recovery to be a gradual one as we need a stabilized housing market and better employment numbers, before we see a marked improvement in the economy. Unfortunately any recovery will leave many economic casualties in its wake.
There may however be opportunities, i.e. diamonds in the rough. Consider that the dollar’s relative weakness may provide good prospects for overseas investment. Otherwise, I’d recommend solid, US-based companies with lots of cash, stable balance sheets, valuable products and/or services and seasoned management.
As I write this, like the aforementioned bull in the pen, I see this so-called recovery zigging and zagging without any clear direction, probably through the first or second quarter of 2010. As for the stock markets, it remains to be seen if the rally is with us for the long term. In short, we need to have a stabilized housing market, as well as better employment numbers, before we see marked improvement in the economy and markets. The one thing I do know is that I will be closely watching the market for signs pointing in either direction and will react accordingly.
If you’re concerned about your financial future, you can call our office to schedule a complimentary, no-obligation review of your holdings.
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