By Kris Davis,
Small Cap Sentinel Staff Writer
You can’t turn on the news for more than 10 minutes without hearing the chic “Bull / Bear” debate. With the Market up around 35% off its low in a 10 week period, I can understand why many would be cautious that we’ve come too far too fast. This is partially the folly in investment strategies; people tend to be short term oriented. They are more concerned with days and weeks instead of quarters and years.
I don’t believe in the old “buy-and-hold” adage, but I do think that investors would be better served with looking at the macro issues and becoming shareholders instead of traders.
So forget where the markets will be today or next week and focus on where they will be next year. If this question were posed to many of the market “experts” I think you would find many bears hibernating.
I want to address the five most common talking points that I constantly hear from analysts who think that the markets are going lower and let you know why I think they are wrong.
Oil is rising: If oil prices rise too much, it can cut into consumer spending and confidence which would be bad. However, I want to see demand increase, which unfortunately leads to price increase. Higher demand, as we’ve been seeing lately, is a bullish sign for the global economy. At $157 a barrel, it was obviously way overpriced, but it was just as underpriced at $35. As long as oil stays in the $50 to $70 range, I feel confident that it won’t change consumer habits and will be a boost to the economy.
Unemployment is high and will likely go higher: Unemployment is a lagging indicator which tells us where the economy has been, not where it’s going. The market is a leading indicator and typically recovers 6 to 9 months in advance of the actual economy. Additionally, the rate of new claims has been sloping downward which shows that fewer companies are laying off. It’s very likely that the total rate will hit 10% nationwide without negatively affecting the market as long as the trend continues to slow.
Volatility is high and people are scared: Although there’s still some fear out there, financial Armageddon has been taken off the table. The VIX, which tracks market volatility is still high, but has been trending lower, which is a bullish indicator. This is also true for consumer confidence, which just had its biggest jump in 6 years. Consumers drive 70% of our gross domestic production (GDP). When they feel better about their situation, the spending tends to follow. Both volatility and consumer confidence are leading indicators.
The government is printing money as fast as they can and inflation will follow: True, we are running massive budget deficits and borrowing more than I’m comfortable with. However, these moves are part of the reason that Armageddon has been taken off the table. The government has thrown everything but the kitchen sink at this recession and it’s starting to work. This is still a deflationary environment and the deficit to GDP percentage is also in an acceptable, albeit high level. At some point, the Federal Reserve will have to raise rates to combat rising prices, but we are still many months away from that scenario. A little inflation can be a huge catalyst for the markets, as long as it doesn’t get out of control.
There’s still bad news to come in the financials: This may be true, but could they be any worse than what’s already priced into the markets? After the “stress tests” results, 10 of the 19 companies were deemed as needing to raise more capital, with Bank of America needing more than all the others combined at 33.9 billion. These numbers were leaked a week in advance of their actual filing. During that time, Bank of America saw a 25% increase because the news was better than expected! I’m not Pollyanna here, but if this news doesn’t cause the sky to fall, nothing will, Chicken Little.
With more traders than shareholders, predicting short term moves is more akin to gambling than investing. I have absolutely no idea of the direction of the next 500 points in the market, but the next 5,000 is an easy call, even for most bears…..after all, a bear’s typical hibernation lasts only four months!
