1st Quarter 2010
There is an old stock market adage: “Bull markets must climb a wall of worry”. There has certainly been plenty for investors to be nervous about over the six to eight quarters. That worry has started to recede as the economy and corporate earnings gradually recover and post positive surprises. Naturally, as the economic news and markets continue to improve, investors feel less fearful and more confident in investing back into the equity markets, as well as parting with some of their cash into buying more goods and services.
The real question in my mind is whether we are going to see 3% growth in economic activity- which would seem more reasonable given the depth of consumer lack of confidence, or a more robust 5% economic growth and what is more of the historical cyclical rate of growth coming out of the bear market which we would normally see as the economy improves. The higher growth rate would support even higher equity prices and temper any market pullbacks- and be more of an opportunity to invest than a return to the bear market and lower values.
Consumer confidence has still not recovered to a level where we would say we are back- and the fears about lost jobs, higher taxes and the impact of all of the new government debt remain a real threat to longer term economic recovery. However the recent economic news has been improving and is setting the stage for possible employment growth and recovering retail sales. While the stock market has made a huge rally off the lows, most investors have focused their investments into bonds, missing the major part of this stock rally, investing billions into fixed income (bonds) or staying in cash.
There is close to 10 Trillion dollars sitting on the sidelines, invested in short term CD’s, T-bills and money markets earning less than 1%. As investors fears and their memory of stock losses start to subside, that money will begin looking for alternatives to invest. So far, most of the money flowing out of money markets has been going into bonds; but as rates remain low, investors are likely to start turning to stocks and would provide more fuel to propel higher stock prices.
If indeed we do get a V shaped earnings and economic recovery, then it will be positive for stocks and strongly supports the case for better valuations going forward. With a solid wall of worry intact, an accommodative Fed, an undervalued stock market and a positive market trend, the foundation is in place to support the bulls and not the bears. If history is any guide, and so far it has been a good indicator in the recovery phase, then we should be in good position to take advantage of a new bull market environment if we do get our 5% economic growth story later in the year.
Bud Rainsberger
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