May 6, 2010
There never seems to be a lack of pessimism for the equity markets these days. A quick scan of headlines warns that strong banking profits can be dangerous for investors, that earnings beat estimates but forecast disappoints, etc. There's a sort of "damned if you do and damned if you don't" mentality among investing journalism. In the same vein, it's oft said that the past year's run up in market indexes is a reason itself to be pessimistic. I can't help but wonder what the purveyors of that perspective were saying around March of 2009. With so much negativity out there I thought it would be worthwhile to use this space to present an alternative, optimistic perspective.
While the past year has seen a strong and quick snapback of the financial markets, the reason for the snapback is not because investors have become optimistic in any significant way. Rather, it is most likely due to a combination of exhaustion amongst sellers, professional money managers chasing performance, and institutions with investment mandates. What we experienced at the worst of the bear market was a sort of negative equity bubble that when burst caused the markets to bounce off levels they should not have ever seen. Now things are getting back to normal yet major indexes are nowhere near their all-time highs. There is still a lot of money on the sidelines: money market accounts are still holding enormous assets; bond funds are still collecting most of the inflows.
The point is that average investors who in aggregate make up most of the wealth in this country have not yet bought in. There are two important implications of that. The first is that the rally has plenty of purchasing power to keep it running. Second, the money yet to be put back to work will not be put into the lower quality stocks that have primarily fueled the rally. These investors, still stinging from losses, will want to invest in higher-quality names that have strong balance sheets and healthy dividends. Those types of companies, usually referred to as value stocks, have underperformed their more aggressive growth brethren for years. Look for that to change.
Though I would agree that the easy money has been made, don't buy into the negativity. They want to scare you into reading their stories. They won't tell you there is something to look forward to. But I will: I believe there is room for these bulls to run.
Brennan Redmond
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).