The steady drip of slightly positive or merely "less bad" economic data continues. This week's data showed that second-quarter GDP grew slightly faster than first thought and CPI inflation was less. Housing numbers were better and prices actually rose. First-time jobless claims declined again and purchasing managers are more upbeat. The picture is becoming clearer. The recovery and eventual expansion will be slow, but it's coming.
In our last blog we said that sooner or later stocks would break through the upper end of the trading range that has contained them since the spring. They did so last Friday and the buying has continued. The month of September was the best since 1939. Short covering explains some of it, but the rest of the buying is by people who anticipate earnings growth. That's a good bet.
There are other reasons too. The largest: alternative investments are unattractive. Professionals know that and they're putting money to work but many individuals are still not on board. That explains why people continue to liquidate stock funds in favor of bonds, never mind the yields and risks of the latter. They'll regret it. Bottom line: stocks are going higher.
Friday, October 1, 2010
Monday, September 13, 2010
Trading Range
So much for September historically being the market's worst month. Stocks are doing very well, rising in all but one session in September. The S&P 500 is at its highest level in a month.
Why the renewed interest in stocks after the August sell-off? The economic news, while still grim, is not quite as weak as investors anticipated, so being "less bad" is seen as a positive for the economy and in turn corporate profits. Couple that with the $3 trillion on the sidelines receiving next to no yield, and you can see why the market has rallied.
I should caution that when the S&P 500 has reached the upper end of its range (1130) the market has looked strong and at the bottom (1040) it has looked terrible. The market is testing the upper end of the range today. Traders who sold when stocks looked good at the top and bought when the market was weak at the bottom were right to do so. But someday they will be wrong. We think that day will be in October but it happen as early as tomorrow.
The odds favor a break through the upper end. Here's why: The negatives are well known: Debt, deficits, slow growth, unemployment, etc. That's old news and already in the market. Potential positives are not in the market. The $3 trillion on the sidelines can fuel a rally and the $1.7 trillion in cash on corporate books (other than financial institutions) will at some point be put to work. When investors expect the worst then the surprises are positive. In time the positive events that will drive the market higher will become known. We expect emerging market country ETFs and higher yielding U.S. equities will perform best.
Why the renewed interest in stocks after the August sell-off? The economic news, while still grim, is not quite as weak as investors anticipated, so being "less bad" is seen as a positive for the economy and in turn corporate profits. Couple that with the $3 trillion on the sidelines receiving next to no yield, and you can see why the market has rallied.
I should caution that when the S&P 500 has reached the upper end of its range (1130) the market has looked strong and at the bottom (1040) it has looked terrible. The market is testing the upper end of the range today. Traders who sold when stocks looked good at the top and bought when the market was weak at the bottom were right to do so. But someday they will be wrong. We think that day will be in October but it happen as early as tomorrow.
The odds favor a break through the upper end. Here's why: The negatives are well known: Debt, deficits, slow growth, unemployment, etc. That's old news and already in the market. Potential positives are not in the market. The $3 trillion on the sidelines can fuel a rally and the $1.7 trillion in cash on corporate books (other than financial institutions) will at some point be put to work. When investors expect the worst then the surprises are positive. In time the positive events that will drive the market higher will become known. We expect emerging market country ETFs and higher yielding U.S. equities will perform best.
Tuesday, August 10, 2010
Deflation
From time to time we're hearing voices mentioning or even forecasting deflation. While few are predicting deflation now, most admit that the possibility is there and in fact rising. To hedge against that possibility investors are nailing down income-producing vehicles now, figuring that yields will be even lower in the future. We are seeing that with many preferred stocks. Most are at levels they haven't seen in a long time, or in some cases ever. While utility stocks have risen for the same reason and rose on Friday after the initial knee-jerk selling, they should be doing even better. Soon they will.
Although yields have fallen, this continues to be a better time to invest for dividends than it is to invest for capital gains. In a slow-growing economy, stock prices and corporate profits will do only a little better than track nominal GDP growth, so dividends and income will count for a good deal of total return.
I do not share a deep concern about deflation. Unlike our experience in the 1930s and Japan's since the late '80s, the Fed and Treasury have both the tools to combat deflation and the willingness to use them. There are few winners when deflation takes hold, but many losers. Stocks decline and businesses and individuals postpone purchases because prices will be lower later. Deflation feeds on itself. It is in the interests of most to see that it doesn't occur. The Fed is well aware of that. The Fed would prefer modest inflation and it has the tools to bring it about.
After Tuesday's Fed meeting it is clear rates will stay low well into next year. Income investors frustrated with returns and tired of chasing bonds higher and higher will increasingly turn to high yielding stocks, utilities especially. Our Reduced Risk portfolio holds these as well as high quality trust preferreds. It is well positioned for this market environment.
David Vomund
Although yields have fallen, this continues to be a better time to invest for dividends than it is to invest for capital gains. In a slow-growing economy, stock prices and corporate profits will do only a little better than track nominal GDP growth, so dividends and income will count for a good deal of total return.
I do not share a deep concern about deflation. Unlike our experience in the 1930s and Japan's since the late '80s, the Fed and Treasury have both the tools to combat deflation and the willingness to use them. There are few winners when deflation takes hold, but many losers. Stocks decline and businesses and individuals postpone purchases because prices will be lower later. Deflation feeds on itself. It is in the interests of most to see that it doesn't occur. The Fed is well aware of that. The Fed would prefer modest inflation and it has the tools to bring it about.
After Tuesday's Fed meeting it is clear rates will stay low well into next year. Income investors frustrated with returns and tired of chasing bonds higher and higher will increasingly turn to high yielding stocks, utilities especially. Our Reduced Risk portfolio holds these as well as high quality trust preferreds. It is well positioned for this market environment.
David Vomund
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