Published: 10/11/11 at 11:00 AM
Last week, we conducted a short survey of our
Investment Digest subscribers. One of the questions asked them
to identify the biggest concern or challenge they face as
investors right now. The top two answers were market volatility
and the economy. Several respondents used the phrase "economic
Obviously, our subscribers' concerns are valid: the economy's
direction is, indeed, uncertain. However, the obvious level of
concern over this makes me think I should revisit a point I
wrote about here a few months ago. Simply, the stock market is
not the economy. The market can, and frequently does, move
counter to the rate of U.S. GDP growth.
The stock market's post-recession recovery began far earlier in
2009 than the broad economy's. And while the stock market now
appears to be reflecting fears of a double-dip recession, this
prospect has been menacing us for over two years now, and the
market has gone both up and down in that time.
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Analysis of news headlines shows reporters trotting out economic
worries as a sort of explanation every time the stock market
declines, strengthening the mental correlation between the two.
Headlines like "Wall Street Slide Sparks Double Dip Concern" and
"Stock Market Tumbles as Fears of Global Slowdown Rise" are the
same every time; the first is from last July and the second from
Faced with this constant intermingling, it's important to remind
ourselves, once again, that the stock market is not the economy.
This was the focus of the Market Outlook section of a recent
Investment Digest, and I want to share some of that wisdom with
you today. Stephen Todd, editor of Todd Market Forecast, wrote:
"It's astonishing. I keep hearing financial commentators, many
of whom have long experience, suggest that the market can't make
headway for the remainder of the calendar year because the
economy is so poor. To this we say nonsense. From March 2009
until April 2011, the Dow rose 6,200 points or 92%. During that
time, the economy was in the doldrums. To be specific, the
unemployment rate went from an already high 8.5% to an even
higher 9.1% during that period, even touching as high as 10.2%
at one point.
"The closest analogue to the current time frame is the early
1980s. Like now, unemployment was sky high, but by the time the
jobs picture really started improving the market was already up
"Do yourself a favor, don't look at the economy when analyzing
the stock market. It will just confuse you... After the market
closed on August 5, Standard & Poor's downgraded the debt of the
United States and a severe knee-jerk reaction took place the
following Monday. The Dow lost over 600 points, but within six
market days, the market had made up the entire loss, and bonds,
which were supposed to suffer from the downgrade, surged. You
have to wonder how bad things really are when our bonds are
surging. Contrast this to Greece, where bonds are collapsing."
Gregory Spear, editor of The Spear Report, wrote (under the
headline "It's Not the Economy, Stupid"):
"Naturally, investors in the U.S. are pricing in a double-dip
recession, but this week we learned that the ISM Services report
for August was stronger than expected, improving from 52.7 in
July to 53.3. Why? The back-to-school shopping season was
actually decent. Are consumers simply whistling past the
graveyard? If it is not the economy, then what?
"Current market volatility is certainly more about confidence
than consumption. This is the metric that accords with the 13%
decline in the S&P 500 since early July. But when it is
virtually impossible to find a piece of good news on the
financial pages, when the pompous pundits of perdition are
gloating, our contrarian voice gets even louder. After all, if
everyone is scared to death, they have probably already acted on
their fears, or are about to. The darkest hour is just before
dawn and dawn is a good time to pick up bargains left for dead
on the Street. In our view, the only question is whether it is
dark enough yet. Unfortunately, we still see a lot of lights on
Finally, John Buckingham, editor of The Prudent Speculator,
"We also remember that we are investing in business and not
directly in the U.S. economy. As Fed Chairman Bernanke said last
week, 'The business sector generally presents a more upbeat
picture (than the household sector). Manufacturing production
has risen nearly 15% since its trough, driven importantly by
growth in exports. Indeed, the U.S. trade deficit has narrowed
substantially relative to where it was before the crisis,
reflecting in part the improved competitiveness of U.S. goods
and services. Business investment in equipment and software has
also continued to expand. Corporate balance sheets are healthy,
and although corporate bond markets have tightened somewhat of
late, companies with access to the bond markets have generally
had little difficulty obtaining credit on favorable terms.'
"To be sure, the path of least resistance in the near term seems
to be to the downside, with yet another (it was hit on August 8,
August 10, August 19 and August 22) retest of the 1,120 level on
the S&P 500 seemingly in the cards. Nevertheless, we continue to
think that those who share our long-term, three-to-five year
investment time horizon should be maintaining their equity
exposure and selectively adding to their portfolios, especially
if stocks move lower still."
Obviously, bad economic news, general fear and lack of
confidence can all weigh on investors' minds, keeping them from
buying. But at the end of the day, it's investors, not the
economy, that determines which direction the market goes.
Today's stock is one from the bargain basement. Goodyear Tire &
Rubber Company (GT) tanked with the market in early August, and
has yet to get back on its feet. But AlphaProfit Sector
Investors' Newsletter Editor Sam Subramanian doesn't think
there's anything wrong with the company, and sees a buying
opportunity here. Here's his recommendation, from last month,
which was in the latest Digest:
"The Goodyear Tire & Rubber Company shares are down sharply from
their $18.25 a share July high. The tire maker's fundamentals
are on a sound footing and the decline represents a buying
opportunity. In the second quarter, Goodyear left analysts'
forecasts in the dust by reporting revenue and EPS surprises of
8% and 141%, respectively. Goodyear targets to save $1 billion
in costs by 2012. While rising raw material costs, intense
competition and the company's underfunded pension pose risks for
Goodyear shareholders, the shares trade at 7X forward EPS and
offer good value for long-term investors. Buy Goodyear Tire &
Rubber Company Below: $10.60. Sell Above: $12.85. Stop-Loss:
$5.50. Risk Rating: Above Average."
Click here to learn more about GT and dozens of other
recommendations from some of the top minds on Wall Street.
Wishing you success in your investing and beyond,
Editor of Investment of the Week
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