Posted by Shyam Moondra
Today's stock market decline may be an overreaction to the disappointing report on new jobless claims. However, the broader indicators continue to be positive, and, therefore, today's market sell-off may turn out to be a buying opportunity.
Recent market reports have generally been good:
· The corporate earnings in the fourth quarter of 2009 exceeded consensus estimates of the analysts. The average PE ratio for S&P 500 stocks now stands at 19, with the projection for 2010 at around 15. This, by no means, makes the stocks as too expensive.
· Sharp productivity gain of 6.2% in the fourth quarter of 2009, the largest gain since 2003, means the corporations have brought down their cost-structure considerably by staying lean-and-mean through the 2008-9 recession. That means, even a slight pick up in demand could significantly boost the corporate profit margins.
· In recent months, industrial production, orders for durable goods, and service industry index have all increased.
· The housing market has stabilized, with increasing home sales and a slight up-tick in the home prices.
· The consumer sentiment and personal savings continue to be positive.
· The market decline may bring an unintended benefit of taming the inflationary expectations that will make it easier for the Federal Reserve Board to phase-in higher interest rates in the second-half of this year.
· The technology sector took a hit in recent weeks, which is actually good for the market. This sector was running ahead of the overall market, making it difficult to sustain the market's upward momentum. However, with the healthy correction in the technology sector, the market is now poised for a sharp up move, led by these same stocks that caused the recent decline in the market.
While the job market has proven to be stubbornly sluggish, as is evident from today's report on new jobless claims, this is nevertheless a lagging indicator. The Senate is considering the new job creation bill that will give a boost to the job market soon. The consumers are not necessarily going to wait for actual job growth before they start aggressively spending again; all they are looking for is an indication that the job market has stabilized and it may soon start growing again.
In this environment, consumer-oriented stocks (such as banks, casinos, hotels, airlines and consumer staples) and technology stocks look attractive.
(Disclosure: The blogger owns stocks in most of these sectors)
