by Jeff Reeves | June 27, 2012 6:30 am
So much doom and gloom is out there these days that it’s hard to come up with new things to write about in the financial and investing news world. Most sites could have put up a banner headline reading “Uncertainty and EU debts weigh on stocks” last month — and would have had it covered.
Maybe I should have just gone to the beach for all of June …
But the market can’t stay down forever. Yes, it’s true that the S&P 500 index is right about where it was back in late January, giving up its early 2012 gains. And it’s true that we’re right about where we were in January 2011 and still significantly off pre-recession levels.
Still, the improvements of the last few years aren’t insignificant. We’ve made progress on unemployment, we’re flirting with a bottom on housing and we’ve seen a huge increase in corporate profits.
Why is the market still flailing around, you ask? Well, because some serious doubts are preventing investors from going “all in” right now. But if a few of these major issues are dealt with, there’s a chance we could see the return of a raging bull market on Wall Street.
It’s naïve to think that all of these issues will resolve favorably in the near future (or ever), but if just two or three of these things come to pass by year’s end, it could spark a major run for stocks.
Spain is borrowing at usurious levels — comparable to what I’d pay if I ever carried a balance on my credit card (which I never do). The Vanguard MSCI Europe ETF (NYSE:VGK) is down almost 20% in a year vs. a roughly 5% gain for the Dow Jones Industrial Average. If it weren’t for Germany, the entire eurozone would be in recession. Need I say more? If Europe can get its act together, a mountain of uncertainty will be removed from the market and the global economy.
I personally am quite bullish on the U.S. economy long-term. But it’s admittedly difficult to be thrilled about the 8.2% unemployment rate for May, and the headline number rising for the first time since June. And some forecasters are expecting that rate to rise again before year-end, possibly as high as 8.5% according to some sources. If we could put a seven on the front of that underemployment figure by Christmas, things would be mighty nice on Wall Street just in time for the seasonal strength that typically ends each calendar year.
While housing appears at or near the bottom, it’s hard for anyone to say with a straight face that we’re in a housing “recovery.” Home values remain down from peak levels in most markets, and significantly so in hard-hit areas like Florida and Nevada. Banks are still reluctant to extend mortgages to qualified buyers, and qualified buyers are fewer and farther between due to the soft job market.
There has been a trickle of encouraging news — such as a May report from RealtyTrac that noted foreclosures were down year-over-year for the 20th straight month. But most folks aren’t looking for signs that housing is continuing to crash, they’re looking for signs of a clear recovery.
A spate of overtly positive housing news could do wonders.
During the crisis days of 2008, it was clear that investors were running scared from cratering Western economies and into high-growth opportunities abroad. Consider that the iShares MSCI Brazil Index ETF (NYSE:EWZ) more than doubled during 2009. The Morgan Stanley China A Share Fund. (NYSE:CAF) was up over 50%.
But since January 2010, it’s been all downhill. While the Dow is up 20% in that time, the EWZ and CAF funds are off about 40%. It’s no surprise why as inflation has become an issue in a fast-growing Brazil, and fears of a hard landing — or the “year of the draggin’” — have been holding back China.
If we could just get some help from other emerging markets now that China and Brazil have fallen out of favor, it could give the market a shot in the arm. Investors just feel like they have nowhere to turn right now since no region seems to be doing well.
A lot of people like to hate on corporate profits, perhaps because they feel it’s unfair for businesses to be enjoying more cash even if the broader economy is in trouble. But businesses need to be making money to spend money on equipment, people and software. And most important, investors need to feel like companies are growing if they’re going to bid up their shares.
Right now, trailing price-to-earnings multiples for the S&P are a tad lower than 13 — and fiscal 2012 PE for the index is in the low 12s. Jim Paulsen, chief investment strategist at Wells Capital Management, recently told Yahoo! Finance that “We’ve never in the post-War era had this low of multiples when interest rates and inflation were also this low.”
If earnings keep moving up, stocks simply have to follow suit — even if these broader macro troubles persist.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the stocks named here.
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