Seven Reasons for Optimism [BRIEFING.COM - Robert Walberg] Investors are feeling just a little more optimistic these days, as indices have posted solid gains over the past two weeks. Though we've seen numerous false starts over the past eighteen months, Briefing.com contends that there are at least seven reasons to remain optimistic...
Accommodative Monetary Policy: While many investors have begun to dismiss the Fed, given that market has turned a deaf ear to this year's aggressive rate cuts, Briefing.com maintains that Fed's efforts to keep economic downturn shallow and short are working... By sharply lowering the funds rate and by fueling strong growth in money supply -- M2 growing at nearly a 10% clip this year -- Greenspan & Co. are doing all they can to establish a strong foundation for economic recovery.
Positive Sloping Yield Curve: Reflecting Fed's efforts is the yield curve... Just as inverted yield curve early in the year presaged the current slowdown, the steep positive sloping curve now points to renewed economic growth.
Stimulative Fiscal Policy: September 11th changed America in many ways... One obvious change -- the political tone of the Administration and Congress... All the talk of discretionary budget cuts and social security lock boxes has given way to a flurry of new spending, as the political leadership works to support ailing industries, rebuild lower Manhattan, and reinvigorate the economy... Additional tax cuts and spending measures, totalling at least $100 bln, are on their way... Fiscal stimulus takes time before it impacts economy, and not all measures currently considered or recently passed will help bolster long-term growth; but history suggests that actions, especially when combined with monetary stimulus, will play an important role in restoring growth.
Inventory Correction: Excess inventories, particularly in the manufacturing and technology sectors were at the heart of the current downturn... Fortunately, we are beginning to see real (economic data) and anecdotal (corporate announcements) signs of that the inventory picture is gradually improving... We're not out of the woods yet, especially given recent events, but mere fact that we are seeing improvement is a hopeful sign.
Earnings Trough: Right now the biggest roadblock to higher equity prices is the extremely soft earnings picture... The earnings downturn has now lasted about one year... By most accounts Q401 will be the fifth straight quarter of negative year/year comparisons... However, aggressive monetary/fiscal stimulus, improved inventory picture and resilient consumer suggest that earnings will trough in Q4... As earnings picture begins to improve, even if that improvement is mostly on a year/year basis at first, investors will warm back up to stocks... Positive surprises, set up by the very soft comparisons, could lead to some explosive gains.
Innovation Leader: Soft markets and resulting lack of financing has made it difficult for aggressive growth oriented companies to survive, yet alone thrive... Nevertheless, America is still at the front of the innovation curve and stands to reap significant long-term economic benefit from breakthroughs in areas such as biotechnology and alternative energy.
Bullish Technicals: Finally, select market internals are flashing buy signals... First of all, percentage of NYSE stocks trading above their 200-day moving average slumped to well under 20% in the week after the attacks... Readings this low are rare historically and when they occur it's almost always a good time to buy... Second, divergences between major market indices and their respective long-term moving averages remain abnormally wide... Given that the indices tend to move to their averages over time, divergences would suggest that additional gains are in store... Should note that wide (positive) divergences between indices and moving averages provided good signal of market top a couple years back... Building cash reserves suggests an unusually high degree of pessimism/caution - typical seen at or near market bottoms... High cash reserves also means that there's plenty of money to chase after stocks once earnings/economy/sentiment turn up... We've done a lot of technical damage over the past several months, and none of these indicators alone means that the next bull phase is upon us... Nevertheless, these developments, when viewed against fact that this is now the third longest bear market since 1929, give reasons to be optimistic.
Robert Walberg |
