Now is no time to panic
Markets climbing wall of worry nicely
By Robert Walberg
Last Update: 12:01 AM ET April 1, 2004
Editor's note: Robert Walberg is a financial writer based in Chicago, Ill.
CHICAGO -- If it's true that the market climbs a wall of worry, then the time to buy is now, as I haven't seen this much worry since late 2002.
Michael Ashbaugh: Beware the market rallies
David Nassar: A contrarian's opportunity
Mark Hulbert: "Sell in May..." in an election year?
Bob Walberg: Climbing the wall of worry nicely
Bambi Francisco: Internet may be April oasis
Louis Navellier: Watch for strong earnings momentum
Tomi Kilgore: Should you be buying the dips?
Stock of the month: Intel
Barry Hyman: April better than March
Richard Cripps: Big Spring for Big Oil?
Robert Brusca: Investing in economic recovery
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Sluggish jobs growth, rising geopolitical tensions, an uncertain election year and growing concern over corporate earnings have created a climate of fear that has paralyzed market bulls. As a result, the major market indices recently sank to their lowest levels since late 2003.
Time to panic? Hardly.
Though traders are justified in their concerns, the fact of the matter is that the market's fundamental backdrop has rarely been much better. And, with the indexes having given back considerable ground in recent weeks, much of the overbought technical tone has been worked off as well.
Consequently, instead of running away from this market, investors should be doing some bargain hunting.
Why am I not overly concerned by the course of recent events and their negative impact on domestic equity prices? Well, let's begin with the anxiety over the economy.
Despite nearly daily evidence that the economy is strong and growing, the investment community can't shake the fact that new jobs aren't being created at a faster pace. However, investors need to remember that employment is a lagging indicator.
While one can argue that by this stage of the recovery we should be seeing stronger job growth, the reality is that many companies are just now getting back on their feet. After years of downsizing, it's only natural for businesses to move slowly in adding to their labor pool. Especially at a time when health care costs are so great.
Nevertheless, as long as GDP growth remains north of 3 percent -- and all indications are that it will -- history suggests that the jobs will come, and with them renewed consumer confidence.
Unfortunately, world events are a wild card, impossible to predict.
The tragic bombing in Spain last month understandably gave rise to a new wave of fear regarding the threat of terrorism. However, the U.S. and the rest of the world are taking this threat seriously and are more aware and better prepared to fight this battle today than at any point in the last twenty years.
While isolated assaults are likely to continue, the very fact that they are isolated means that they will have little lasting impact on the global economy or world markets.
Meanwhile the psychological impact, while often dramatic, is typically short-lived. Barring any new terrorists strikes in the days to come, the market will begin to refocus on the real drivers of price -- the economy and earnings.
Before discussing the earnings outlook, let's take a quick minute to review the domestic political scene. President Bush has seen his approval rating slip back to the 50 percent area -- a danger zone for any incumbent. But much of the decline came during the primary season when the Democrats -- and their attacks on the administration -- were winning all the headlines.
Now it's a two-man race between Bush and Kerry. While the challenger is a formidable opponent with momentum, experience and a unified Democratic party behind him, he's trailing badly in one key area -- money.
The President will outspend Senator Kerry by at least 2-to-1, and that's a big, big deficit to overcome. As long as the President's approval rating remains north of 50 percent, look for him to win by a surprisingly comfortable margin come November.
As for earnings, first-quarter numbers are about to roll in and when they do look for investors to give a big sigh of relief. There has been more good news than bad during the preannouncement period and that usually signifies a strong quarter.
At present, the street is expecting the S&P 500 to post earnings growth of roughly 15 percent. The good news from a trading standpoint is that unlike last quarter, the market has been under pressure heading into the numbers. Consequently, as the headline figures turn pessimism into optimism, look for stocks to stage a broad-based advance.
If these assumptions are correct and the market is about to launch into a broad rally, which groups and stocks are likely to lead the charge? While it might be tempting to look at some badly battered groups -- such as the airline industry -- for a quick, meaningful turnaround, the better bet is likely to be in the groups exhibiting the strongest earnings growth.
In addition, the sectors that held up best during the correction are apt to maintain their momentum when buyers return.
Therefore, groups such as telecom equipment, gaming, oil services and equipment, retail (especially apparel) and restaurants should pace the market recovery.
Within these groups, a few stocks exhibiting the fundamental and technical underpinnings necessary for outsized near-term gains include: Juniper Networks (JNPR: news, chart, profile), Nextel Communications (NXTL: news, chart, profile), MGM Mirage (MGG: news, chart, profile), Aztar (AZR: news, chart, profile), International Gaming Technology (IGT: news, chart, profile), Nabors Industries (NBR: news, chart, profile), Oceaneering International (OII: news, chart, profile), Pacific Sunwear (PSUN: news, chart, profile), Gap Inc. (GPS: news, chart, profile), Darden Restaurants (DRI: news, chart, profile), and California Pizza Kitchen (CPKI: news, chart, profile).
Remember, it's not what you own going into a correction that's important but what you own coming out of one. With the market poised for a rebound, now is a good time to retool your portfolio and position it for the next run. The groups and stocks cited above are a good place to start that process. |
