A client and I were talking and I shared with him that I did not foresee this first quarter bull market. He said to me with sarcasm, "You must be the only one." His point was this: others can't seem to forecast the future either. Having said that, allow me to throw a dart at the proverbial market dartboard...
A client and I were talking and I shared with him that I did not foresee this first quarter bull market. He said to me with sarcasm, “You must be the only one.” His point was this: others can’t seem to forecast the future either.
Having said that, allow me to throw a dart at the proverbial market dartboard...
What a difference a year makes!
On March 26, 2009, the Dow Jones Industrial Average closed at 7924. A year later, March 26, 2010, the day of this writing, it was 10,850, a 37% advance. From the Dow’s earlier low on March 9, 2009 to this same date, March 26, it shot up 66%.
The Standard & Poor's 500 and NASDAQ 100 acted similarly. This remarkable spurt in just over 365 days is worth years of historical gains. It wasn’t the typical investor who was participating in this dramatic rally. He or she was still suffering from mental trauma due to our 2008 debacle. It was the gutsiest traders, some of whom continue to charge.
This first quarter rally was generated by positive forward projected earnings and low interest rates plus help from the government. Also, the debt problems in Greece and other European countries like Portugal made the US look stronger. I don’t believe these fueling factors can be sustained in the future. The question is when will our past catch up with our future and reflect itself in the stock market?
Here are some considerations:
Projected earnings are not real earnings
We have yet to see them materialize. If they don’t, this scenario translates into lower investor confidence and subsequent selling of stock positions.
Low interest rates have an expiration date
If I were to predict when that would be, I would say, 4th quarter this year or the first quarter 2011. Higher interest rates act as a suppressant for the stock market because companies and consumers are more reluctant to borrow at higher rates and growth is slowed.
Help from the government
Though it seems to be never ending, continued government intervention will fuel inflation, which ultimately could hurt consumers, especially retirees on a fixed income.
Problems in the European Union
Though seemingly positive for the dollar, these issues really harm us. This is because a stronger dollar means fewer exports from the US because they are more expensive in the currency of other countries. This situation equates with a further loss of revenue and jobs for the US.
In addition, as a nation, we are seeing a housing market in trouble, continuing high unemployment and banks still failing. The government is spending way beyond what it currently taxes us, though it is trying to correct that situation. And, there are always those pesky geopolitical threats that are totally unpredictable.
This pretty much sums up why, in my opinion, things will get worse before they get better. This means that maintaining cash to invest during a significant dip or dips could be wise as well as not investing at the current levels. For those who are lucky enough to be heavily in stocks at present, taking some positions off the table would work if this prediction is true.
That being said, forecasting the future does not make it come true. But, if you believe as I do that we have yet to experience market pain before there is a great deal more pleasure, at least the preceding sentences in this paragraph give some guidelines.
At the same time, remember that Irving Fisher, one of the greatest economists of all time, said in 1929, “Stocks have reached what looks like a permanently high plateau.”
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