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Published: June 1, 2010
For most investors, the health of the U.S.
economy should be the most important item to track. How the
economy fares will directly correlate with how the Nasdaq, NYSE
and S&P 500 perform -- over the long-term. But right now,
attention is focused on many "outside" factors, most of which
are more relevant to foreign investors or short-term traders. If
you let those factors rattle you, you’re likely to move to cash
at the wrong time.
To be sure, the recent market weakness can test anyone’s mettle.
But should we really be surprised at a -10% correction after we
saw the S&P 500 move from 700 to 1,200 in just 14 months? That
kind of +70% move is virtually unheard of, and should have led
to some near-term caution. But the pullback doesn’t mean the
rally has ended. Indeed, the most important pieces of data are
flashing green.
For example, the Institute of Supply Management’s (ISM)
index of factory activity in May has just been released, and
the rate of orders held steady from the prior month at 65.7.
(Any number above 50 indicates that the factory sector is
expanding). In addition, the ISM’s employment index expanded
last month from 58.5 to 59.8. That means that the monthly jobs
report, due out this Friday, is likely to be in line with or
above forecasts.
Consumers Getting Stronger
As many headed off for a long holiday weekend on Friday, they
may have missed some important data regarding consumer spending.
The Commerce Department noted that consumer spending barely rose
in April after rising for six months. Bad news, right? Actually,
personal income climbed 0.4%, in line with recent monthly gains.
That means consumers are looking to bolster their savings and
pay off debt. The savings rate rose to 3.6% in April, from 3.1%
in March, and could well rise further as consumers remain
cautious. After all, the nightly news is in “scare mode” right
now. That may crimp spending in the near-term, but should set
the stage for stronger consumer balance sheets down the road. If
household savings keep growing, and if job creation continues,
the economy is very likely to get back on to a path of
sustainable growth. It’s too early to sound the all-clear on the
economy, but the scary headlines out of Europe, the Gulf Coast
and the Middle East are decreasingly likely to have a major
negative impact going forward.
More than likely, economic growth will not
be robust this year, as we’re still feeling the after-effects of
the global economic malaise of 2008 and 2009. But the trend is
positive, and growth should become more inspiring next year and
into 2012. And remember that investors look six to 12 months
ahead, so the market is likely digesting the tepid growth
outlook right now. By this summer, the market should look ahead
into 2011, and should like what it sees.
Action to Take --> A wide
range of stocks are starting to trade down from their highs,
even as the respective earnings outlooks are materially
strengthening. Companies that have pared expenses in recent
years can continue to show robust profit growth with just modest
sales growth. That backdrop fueled a powerful rally in the 1990s
as profit margins exceeded previous highs.
Here's just a sampling of companies whose shares have fallen
more than -25% from their 52-week highs while also seeing their
earnings estimates rise during the past 90 days: Seagate
Technology (NYSE: STX), Integrated Silicon Solutions (Nasdaq:
ISSI), Deer Consumer Products (Nasdaq: DEER),
Electronic Arts (Nasdaq: ERTS), Dell, Inc. (Nasdaq: DELL)
and Denny’s (Nasdaq: DENN).
If you’ve got cash to put into play, wait for days when the
market is sharply trading off. With all the daunting global
headlines right now, that’s bound to happen soon. Happy hunting.
-- David Sterman
Contributor
StreetAuthority |
