Market Pulse: Oh my
This is the best start to January for the Russell 2000 and the S&P 500 since 1987. But stocks were coming off the worst December since 1931, one in which the market fell as much as 20 percent from its recent high.
The degree of pessimism last month was unrelated to life in the real world and destined to be short-lived. A rebound was overdue. Now we have one fueled by the likelihood that the trade dust-up with China will fade, interest rates won’t rise much if at all, inflation will remain a non-event and GDP and profit growth will be healthy even though off their best levels of last year.
What’s not to like?
Still, some say cash is king again, but after taxes its total return is zero after inflation. That’s partly why three weeks ago investors emerged from the bunkers they jumped in the day the Dow lost 660 points. Stocks soon recovered all that ground and much more.
The trigger for the market’s recovery was the December employment report that showed the creation of 312,000 private sector jobs and a jump in wages. No wonder people are spending more money. They have more.
My investment experience goes back 32 years and I have seen extremes — too many to list. There was the 1987 crash, the dot-com mania until 2000, and the capitulation in 2009 during the financial crisis, Bitcoin mania a year ago, etc.
There have been extremes of both optimism and pessimism. People can be panic buyers … or panic sellers. We saw some of the latter in December amid unfounded concerns that a recession is not far off.
The market’s December low was extreme in view of the solid earnings numbers and the outlook, alternative investments and a neutral valuation (14 times earnings). Investors were pricing in recession-level earnings, so sure were they that there is trouble ahead.
Few economists expect a recession this year. I don’t. Why investors felt otherwise I can’t say.
Wharton’s Jeremy Siegel expects stocks to return 5-15 percent this year, not counting dividends. Stock buybacks ($1 trillion) will explain some of the rise.
Underinvested hedge funds and others will return to stocks. So will foreigners. Siegel believes that at the market’s recent low prices reflected most of the negative impact on earnings of a recession, which by the way he also does not expect given the employment picture and other metrics.
Siegel has a long record of being right.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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