Friday, October 26, 2012

Mixed Messages

After a nice 6% gain in the S&P500 from August 1 thru mid October, the S&P500 has gone back to the level of August 7. (Down 2% this week.)  Still, that’s a 12.7% gain since October 26 of last year.

Things seem to be getting better, slowly.  But, nobody is quite sure what the short term future holds.

Up until recently, consumers seemed to be a bit in a funk, worried about unemployment and falling housing prices. Today, however, Consumer Sentiment rose to a level higher than any level since 2007. Unemployment and housing seem to be improving.

Presently, the worry seems to be concentrated in the upper levels of management in the business community.  Corporate Earnings, that seemed to be growing, despite or even perhaps because of high unemployment in the past, have now stopped growing in the aggregate. (They’ve fallen in the important Tech Sector.) Most companies are still doing quite well, but warnings from pessimistic CEO’s about the future has created some pause on the part of institutional investors and speculating short term traders.  (Keep in mind that CEO’s love to “sandbag” and lower expectations as they generally look smarter if they beat estimates about the future rather than fail to meet them. That is why I always take “forward guidance” and “analyst expectations” with a grain of salt.)

Seems like consumers are not too worried about the heralded “fiscal cliff” of rising taxes and lower defense spending—figuring that no matter who gets elected this year, for the most part, individual taxes for most people will not be going up very much.  Business leaders on the other hand are saying that they are very worried. 

Consumer Sentiment and Business Sentiment are both important. Consumer Sentiment (presently up) determines consumer spending—around 70% of the economy. Business Sentiment (presently down) determines business investment and employment decisions---which tend to affect Consumer Sentiment in the future.

All that this situation tells us is what should already be obvious---in order for corporate profits to rise and the stock market to rise in response---we need growth in global demand.  Trust me---every politician and government in the world knows their job depends on robust global growth resuming and they are doing everything they know to do, to make it happen.

Markets are still wary of uncertainty about Europe, China, Middle East Geopolitics, and US Monetary/Fiscal/Tax Policy.  Any of these could affect markets in the short term. But it is precisely because of this short term uncertainty, stock prices are depressed—providing very good long term opportunity in many cases, for specific investments.

While there seems to be a lot of risks affecting short term global growth---there is growing evidence, barring any unexpected global shock, that robust global growth is on the longer term horizon. Beware, when robust global growth returns, it will probably bring along it’s pesky friend—inflation.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.