Signs of Hope for Stock Markets
Last week I had the good fortune of spending a few hours with a well-respected (but not widely-known) economist at a time when there was a lot of news to discuss. The insights were a great counterpoint to the news and a reminder that when everyone else is calling for the end of the world it might be a good time to buy. My impressions were that stock valuations are already fairly high, but in spite of all the negative news there are signs of strength that may sustain further growth.
A focus of the discussion was on the US economy since it drives most North American markets. All is not well, but the headlines are missing a lot of useful information. A few interesting points were:
- Corporate balance sheets are much stronger. In 2007 they were over-leveraged, but now they have built up so much cash that everyone is wondering when they will act. This gives them options and security, and lessens the chances of another crash.
- Capital goods spending is accelerating rapidly and even getting close to past peaks. Businesses are investing their cash.
- Job creation is picking up in businesses. Even if the US government has its hands tied (or cut off), job growth seems to be going at a sustainable rate. In fact the latest US numbers were positive in spite of shrinking government jobs.
- Consumer spending is reviving. Major purchases may have been delayed in the bad years but eventually they do come through.
- Even the housing market may have its day soon. There is still a large inventory of unsold homes, but like someone who has been out of work for a few years those are getting to the point where they aren’t even in the regular market anymore. New home construction is picking up and if it continues it could give a boost to the economy.
- The US dollar is weak. This may have positive effects for exports.
- Credit is getting much easier to obtain. Large corporations can rely on bond markets and other mechanisms, but small businesses have been held back by tight bank lending until recently.
- The market frequently swings on monthly reports, but the economy doesn’t change direction every month. High-frequency data is noise.
Another good point he made was that most economists and market commentators have one view that they stick to. If it’s happening now they talk about how they were right all along. If it’s not happening now they talk about how it will happen soon. It’s rare to find someone who can actually switch between different positions depending on what the indicators point to.
Is this information we can trade on? As the efficient-marketers will tell you, everyone knows this. But they may be focused on other news that grabs more headlines. This isn’t all you need to know but it just shows again how markets can overreact to bad news and give you opportunities. This week may well give even better buying opportunities if you need to increase your stock allocations.