Things have been bleak on Wall Street lately, and many investors are wondering if they should call it quits. After all, it’s been a pretty good run on Wall Street across the last 18 to 24 months.
Don’t do it. The next leg up for stocks could be even bigger.
It’s true that there are definite causes for concern. Recent disappointing employment numbers for May show the uphill climb for the jobs market isn’t getting easier. Fears about federal spending and an impasse over the debt ceiling have many worried about America’s credit rating and whether Uncle Sam has any resources left to lift the economy. The list goes on, and I’m painfully aware of the challenges. (For instance, read my 3 reasons to panic about Obama’s economic plan).
But it’s not all gloom and doom out there. Allow me to briefly cover 11 reasons why stocks may not be in as bad a shape as you may think:
Companies are Flush With Cash: Stocks are hoarding the most cash in history. As of the first quarter, non-financial U.S. companies held $1.84 trillion in cash, a whopping 27% more than in early 2007 before the recession. Yes, it’s good to have a rainy day fund – but at some point, companies have to put that cash to work hiring new employees or buying equipment or expanding operations.
Corporate Bonds are Free Money for Stocks: Additionally, with interest rates so low, you’d be silly NOT to borrow cash if you’re a company in good standing. Take Google (NASDAQ: GOOG), which floated its first ever bond offering for $3 billion a month or so ago. Why take on debt despite an already huge cash pile? Well, because investors snapped up three-year notes from the tech giant at a measly 1.25% rate. This “debt” may actually wind up making Google money if the rate of inflation stays high. It really is free money – money Google will presumably use to grow.
‘High-Yield’ Savings Accounts Aren’t: Speaking of low interest rates, so-called “high-yield” savings accounts are in the ballpark of a 1.2% annual rate right now. Not what I’d call high yield at all. The best one-year CD rates this week top out at around 1.3%, and a five-year CD won’t get you much better than 2.4% annually. Ask some folks, and that won’t even keep pace with inflation – so obviously you need to do better to grow your nest egg. That’s a big incentive for investors to put their money in stocks.
Treasury Rates Stink: Along the same lines, as of this week, we’re looking at about a 3% return on the 10-year T-note. Not very impressive – and that’s down significantly from a 3.7% rate back in February. If you don’t want to tie your money up for a long time, you’re looking at less than 0.45% on the 2-year note. Whoopee. (Related Article: Did Bill Gross blow his call on Treasuries?)
Big Dividends in Stocks: If your reason for focusing on CDs or Treasuries is income, investors can still find some tremendous dividend payers that will deliver much better returns. Drugmaker Pfizer (NYSE: PFE) yields almost 3.9% — even after an 18% run so far in 2011.Telecom AT&T (NYSE: T) pays a 5.6% dividend and has tracked the market with over 4% gains in 2011. Tobacco giant Altria (NYSE: MO) is up 10% in 2011 and also yields 5.6%. And there are a host of other lesser-known utilities, conglomerates and the like paying similar yields or better. As we discussed regarding Treasuries and CDs, even if shares flat-line and all you get is your 5% or 6%, that’s a heck of a lot better than other investment vehicles – which will attract investor capital.
Bargain Valuations for Blue Chips: There are some who scoff at the idea of price-to-earnings calculations, since they are based on estimates that will change. I agree P/E shouldn’t be your only reason for buying, but it should be on your radar. And right now, the radar has plenty of blips that are bargains. In tech, Microsoft (NASDAQ: MSFT) has a forward P/E of 8.8. In manufacturing, Caterpillar (NYSE: CAT) is cruising around 10.8. Big pharma leader Pfizer (NYSE: PFE) is around 9 flat. And as I pointed out in my column on bank stocks last week, the entire banking sector has a P/E of only slightly above 9. The list goes on.
IPO Boom: We’ve already seen some big splashes with companies going public in 2011, including RenRen (NYSE: RENN) and LinkedIn (NYSE: LNKD). First quarter IPO proceeds hit $12.4 billion, up almost 200% over last year. That topped every first-quarter IPO total in the last decade except for 2008, which was skewed by a mammoth Visa (NYSE: V) offering that approached $18 billion all by itself. What’s more, there is a host of high-profile IPOs in store for the coming months too – including Dunkin’ Brands, Facebook and others. The fact that corporations are eagerly jumping into the stock market right now indicates that the companies themselves they think things are favorable for equities. (Related Article: 4 biggest risks to Facebook’s IPO)
Steep Market Declines Signal a Buying Opportunity: Last week, the Dow closed below 12,000 for the first time since March 18, finishing a six-week free-fall. That kind of losing streak hasn’t happened since the week ending Sept. 30, 2002 … but guess what? That marked the end of a 30-month bear market and a great historic buying opportunity. The 12 months following October 1, 2002, saw 20% gains for the Dow Jones Industrial Average, and over 30% gains across the next 24 months.
Floods, Tornados and Tsunamis Aren’t Permanent: It’s worth noting that many of the economic data points indicating a slow-down in the global economy have happened amid a tremendously grumpy spell from Mother Nature. Some have estimated the financial impact of Midwest flooding at $8 billion and counting. The Joplin, Mo., tornado could cost as much as $3 billion. Then there’s the earthquake and Tsunami in Japan that has a price tag in the range of $250 billion to $300 billion. The impact of these recent disasters has been slowly trickling through the global markets – but is not a permanent setback.
The U.S. is Still Growing: In an interview with The Wall Street Journal, the president of the Chicago Fed said he expects the economy to grow by 3% to 3.25% in 2011, and then 3.5% to 3.75% in 2012. Separately, the Dallas Fed president and Philadelphia Fed president both predicted growth of 3% to 3.5%. I know, I know – many readers out there will thumb their noses at anything these guys say. But consider that the Business Roundtable’s second quarter CEO survey published on Tuesday surveyed 2.8% growth. Slightly lower for 2011, but still a positive sign. (Related Article: 10 scary economic headlines you shouldn’t fear)
The World is Growing Too: Even if you believe American stocks are sunk, global economic growth for 2011 as predicted by the World Bank is expected to be 3.2%. For those who want to focus on the hottest emerging markets, Russia GDP will increase 4.2% in 2011 according to estimates, Chile GDP could grow by as much as 6.5% this year, India will grow by 8.0% and China by 9.2%. Even the battered euro zone is at least plodding upwards, with real GDP growth for member states forecast at 1.5% to 2.3% on the year by the European Central Bank.
Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.