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MARKET
OUTLOOK
OK,
so I’m starting to sound like a broken record.
Instead of writing a whole new commentary,
perhaps I could just write “for
new market outlook, see past market outlooks”.
As you may note from past newsletters, I
have been extremely guarded about the financial
markets going back to October of last year.
The
over-riding theme of those commentaries:
VOLATILITY
The
first half of this year has provided quite the
roller coaster ride, even more so than the second
half of ‘07, which bounced around plenty for the
comfort level of most investors.
After the stock markets started slipping in
early January, we landed with a thud right after
the long holiday weekend.
After recovering some through February, we
landed pretty hard again in March as a number of
major financial events unfolded.
With
optimism rising, with hopes our economy would
avoid recession and that perhaps the worst was
past, the stock markets rallied strongly through
most of April and May.
It was a little difficult to watch the
market improving as I continued to advise caution
and maintained some defensive positions for
clients. Was
that the turn that would send us into another bull
market run?
Unfortunately,
it is my conviction that we should maintain
guarded expectations and be excessively prudent at
this time. It
is true that we may have seen the lows in March
for some sectors of the stock market, for some
individual stocks.
However, that does not mean that the
long-term opportunities in those stocks are past.
The one thing we know about this cycle is
that both the rallies and the declines have been
sharp, whether they’ve lasted a couple weeks, a
couple days or sometimes only a couple hours.
Another
historical note that we need to be keenly aware of
is the seasonal pattern of the stock market.
Summer is generally a time when trading
VOLUME drops off significantly.
In other words, historically, there are
less shares of stock traded during summer than
during other seasons.
This lighter volume, fewer buyers and
sellers, actually works to enhance volatility.
This is another key reason that I’m
extending my cautious outlook.
Lastly,
there’s a lot of talk out there about the
general state of our economy.
I’m sure the volume is a little higher
this year because of the political implications.
But nonetheless, it is a major topic and
there is still quite a bit of debate.
The bulls and the bears seem to battle
daily over economic numbers.
It seems like every day, there’s new
information out about inflation, interest rates,
unemployment, economic growth, housing, etc.,
etc., etc. … oh, and etc.
Short-term market moves seem to be
completely contingent on whether the statistic of
the day was better or worse than “expected”,
as if there’s some secret “Expectations
Committee” out there that draws that line for
us.
Here’s
what I know. Regardless
of whether they have been better or worse than
expected, the statistics for our economy have been
rough and policy makers are increasingly faced
with a number of very difficult choices.
I don’t think we need to be
Harvard-educated economists to have a feel for
what’s going on in the economy.
All we have to do is notice the ‘for
sale’ signs in our neighborhoods, read in the
paper about the still-increasing number of
foreclosures, or walk up to the grocery store
register. I
hate to even mention the dizzy feeling we’re all
getting as we watch those numbers spin faster and
faster on the gas pump.
Here
are some of MY expectations:
1)
Gas
& Food Prices will continue to rise at least
through 4th of July, possibly longer.
And while prices will probably drop some
after “driving season”, I think they will
remain higher than seasonal norms.
2)
Housing
will continue to be difficult until we get past
the foreclosure issue, which I believe is heavily
reliant on employment and wages, which have been
declining, and of course, on fixing some of these
risky mortgages.
I have no idea when that will be.
3)
While
I believe there are some sectors that are a little
more insulated or protected from the economic
situation, I think most sectors are neck deep in
it, particularly
a.
Banks
and other financials,
whose ability to earn money is heavily tied to
lending money.
Whether mortgages to individual homeowners
or bigger loans for development, that significant
revenue stream will be difficult to replace.
The lowering of interest rates by the
Federal Reserve should help profitability
eventually; but even that is in jeopardy as the
Fed considers whether to “un-lower” rates due
to the threat of inflation.
It’s complicated, providing enough reason
in and of itself to be concerned.
b.
Retail
companies
are quite obviously reliant on consumer spending,
which has been drying up under all the economic
factors I’ve already discussed.
The truth is that most people are
tightening up the purse strings.
And while I’m sure the stimulus package
may help some retailers in this quarter, I think
that we have to see some resolution to the deeper
underlying problems before they can become good
longer term investments again.
There are some exceptions; some of the
bigger discount retailers have performed well and
probably will continue to as shoppers seek out
savings.
In
conclusion, unless something major changes, I will
continue to play things cautiously, particularly
through July.
While I don’t intend to be closed-minded
in the near term, I do believe that August will
provide the next big opportunity to evaluate the
situation. We
will have heard from most companies as to how the
second quarter went and what they’re expecting
business to be like over the coming quarters.
Hopefully, we will find ourselves on the
down side of energy costs and summertime
volatility. With
any noteworthy vision of light at the end of the
tunnel, we could set up for a more sustainable
rally. We
shall see!
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