In the last several trading sessions, the stock prices have come under pressure because of the fear that Europe’s economy may be slowing down. Also, there are some investors who believe that the market is ripe for a correction simply because it has been going up since it bottomed out in 2009 at the height of the financial crisis. While it is true that recent data from Germany and elsewhere in Europe suggests that the EU economy may be cooling off but there are no signs of an impending recession. In fact, in recent months, dollar has strengthened considerably relative to other world currencies which should help EU and Asia, especially Japan, grow their exports of goods and services to the U.S.
The great bull market of the last few years is not over yet. The 4.6% decline in DJIA (5.6% in S&P 500 and 7.25% in NASDAQ) from its record high is due to normal profit taking and is healthy for the bull market to keep charging ahead. The market peak is generally indicated when stock prices go up sharply several days in a row with heavy volume and there is “irrational exuberance” among the investors. However, that is not the case here; the market has been going up for the last several years at a steady pace with relatively low-to-moderate volume.
The latest economic reports on unemployment, retail sales, consumer confidence, and inventory accumulation by manufacturers do not point to an impending recession in the U.S. and, as such, any talk of the bull market running out of steam is pre-matured.
Below are a wide range of indicators that suggest that the economy is likely to continue to grow and the stock market is likely to continue its bull run for the foreseeable future. Therefore, the current decline in stock prices afford an excellent buying opportunity for long-term investors.
· Inflation continues to be
very low. Strong dollar will make imports cheaper and thus help keep a lid on
the prices in the U.S.
· Interest rates will go up
but they will still be much lower than the historic rates. The Federal Reserve
Board has reaffirmed that they will continue with expansive monetary policies
at least for now. Most economists expect that the Fed would not start
increasing interest rates until the summer of 2015.
· The job market continues to
get stronger with the unemployment rate declining to 5.9%. The FED expects
further gains in the job market in the coming months.
· The US oil and natural gas production is steadily increasing, which is not only creating new jobs but also helping push the energy prices lower. Citigroup has estimated that the recent decline in oil prices would save energy-intensive industries and consumers to the tune of $1 trillion, which will act like stimulus to the global economy.
· The consumer confidence and
spending remain at high levels. The recent decline in oil and gasoline prices
will put a few extra dollars in the consumers’ pockets which will help keep
economic activity in high gear. Also, the consumer debt, which is much lower
than in 2009, has room for further expansion.
· The corporate balance sheets
are the strongest in decades with a cash hoard of close to $4 trillion. The
CEOs of large companies have generally expressed optimism for the U.S. economy
in the foreseeable future.
· The current stock valuations
are not excessive. The WSJ estimates the forward PEs as follows: 14.73 for
DJIA, 15.85 for S&P 500, and 18.41 for NASDAQ; these ratios are nowhere
near what they were at the market peaks of 2001 (when PEs were in 30’s) and
in 2007 (when PEs were in 20’s). Last week, Alcoa and Pepsi reported their 3Q14
earning reports and they both beat analyst estimates which augurs well for the current
earnings season. If other companies report just as good earnings in the coming
days, the market could get a big boost and head to new record highs.
· The federal budget deficit
has been declining faster than expected, which will help keep interest rates
lower. In any case, the Congress needs to do its part and reform the tax code
and undertake meaningful spending cuts to put the financial house of the
federal government in order, just as most state governments have done already.
Banks (with increasing loan demand and widening interest spread), defense contractors (with crises in Ukraine and the Middle East forcing countries to increase their defense outlays worldwide), technology companies such as GOOG and PCLN (that got hit hard in this decline), and specialty chemical companies (that are benefiting from the recent decline in crude oil prices), could see their stocks bounce back strongly.
A few days ago, Warren Buffett said he was “buying.” Who would want to argue with that?
Disclosure: The blogger is long on the stocks/sectors mentioned.
