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Fear could overwhelm this market and cause further downdrafts. But the economy is growing and the stocks that make up the S&P 500 are outperforming what the analysts expect.
Josh Brown at The Reformed Broker has a great post summarizing all of the fears on this market. As optimistic as I am about the economy, the fears Josh brings up are real. Perception (the fears) becomes reality in the stock market.
For the reasons Josh lists, the average investor is delaying getting into the market (or leaving the market altogether). But let’s go down Josh’s litany and see what’s the most cause for concern.
Technicals. “Every chart is broken.” It always feels ugly when the market is at or near lows. At that point the charts are always broken. In March 2009 all the charts were all broken and most pundits and analysts were calling for a Dow 4000 that never hit. I’m not sure charts have any long-term predictive value. Technicals basically work until they don’t.
“Double dip worries.” With ISM Manufacturing above 60 and straight up growth in nonfarm payrolls since June 2009 I don’t think we’re in danger of a double dip at the moment. Not to mention at least half of the 2009 stimulus package still needs to be spent.
“Spain.” Josh brings up a scary point. Spain is much larger than Greece and any economic stress there will certainly be felt worldwide. The real issue with Greece is that it’s the tipping point, not the real pressure point. Whereas Spain could be the pressure point. But I do think the Eurozone saying it will throw at least one trillion at any issues will certainly deflect any issues that occur (even if it does mean devaluing the euro to the lowest common denominator).
“China.” The Chinese market is down 20% on the year and there are signs its economy is weakening. However, the central bank has stopped tightening (will “don’t fight the Fed” work in China?). More importantly, we don’t really care that much about the Chinese economy. We are the customer! They are more dependent on us than we are on them. They are the exporters and we are the importers. Ultimately, they will do fine (don’t fight the Chinese Fed!) but its success or failure should have minimal effect on our stock market.
“North Korea.” This worry pops up like clockwork every two to three years and here it is again. And before I even finished typing this sentence there’s already news that the two sides are “in discussions.”
Josh did mention that one holdout of optimism is that earnings season was good. Right now analysts are estimating that earnings for the S&P 500 in 2011 will be at $94. With the S&P 500 still flirting with 1000-1100 that puts us at 10-11 times earnings for next year. The historical average is 15x and its gone higher than 20x (1999).
Bespoke has a great list of triple play stocks: stocks that beat earnings and revenues estimates and raised guidance. These are a good start for companies that will continue to drive the S&P 500 earnings growth and will survive any of the above worries. Stocks on the list include Intel (INTC), IBM (IBM), EMC (EMC), United Health (UNH), Humana (HUM), Starwood Hotels (HOT), and Whirlpool (WHR).
James Altucher is a managing partner of Formula Capital, an alternative asset management firm, and an author on investment strategies. Unlike Dow Jones reporters, he may have positions in the stocks he writes about.
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are you talking about the markets or the economy’s perspectives? it looks like you are concerned only with the markets direction, which seems to be supported well by this heavy and think liquidity gravy central banks are providing. but sooner or later comes the point (won’t be too far off in the future) when this simply does not ’stimulate’ anymore. then what? we’ll see more stimulus, decade long free money promises japan style?
what you are missing here is that absolutely nothing has been done so far to fix the foundations of the economy that can make it function at even 2% nominal interest rate.
@Chris, you bring up a good point. We do need them to buy our dollars. BUT, again, do we need them or do they need us? They have more of our dollars than we do! They don’t want the value of those dollars going down too much so they have to keep supporting it. We’d actually be fine if our dollar went down because it would make our debt service cheaper and it would drive up our revenues, like its been doing since 1900. But Chiina wont’ let us off the hook that easy so they keep buying our debt to support the dollar.
James,
While Wall St. does love to climb a wall of worry, how can you say that China is more dependent on us than we are of them? Without them gobbling up our debt like a fat kid does a Happy Meal, we wouldn’t be able to have stimulus package 1, 2, 3 etc. Additionally, they import all of their commodities and it’s clearly affected the price of commodities with their slow down. See this post that I wrote and tell me what you think. http://chrisciaccia.tumblr.com/
Best,
Chris
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