A six-week rally in the stock market is creating new optimism among investors. Since its low on March 9, the Dow Jones Industrial Average has jumped 24%. Better-than-expected earnings reports from firms such as JPMorgan Chase & Co., Goldman Sachs Group, and Wells Fargo are helping to power the upswing.
The surge could be short-lived, however. BlackEnterprise.com asked a few market experts, and asked, “Are we witnessing a permanent market recovery?â€
Randall R. Eley
President, Chief Investment Officer and Portfolio Manager
Edgar Lomax Co.
A: Yes, but …
Long-term, we may see bear and bull markets moving in and out more frequently than we are use to. There is still some question about whether the stock market needs to go down to historical bear value before going back up. If I were to see the Dow fall somewhere between 5500 and 6500, then I think we will be at a level from which a more sustainable rally could begin. We would have a market that was truly undervalued, where stocks need to be bought with money that the investor does not need to spend for another 10 years.
A good sign of a permanent market recovery is the fact that some of the large financial institutions have reported relatively good earnings the first two quarters. But these companies are not out of the woods yet because their balance sheets are overleveraged. But they are not likely to collapse and go out of business. America’s problem for many years has been leverage (debt). We are finally seeing a resolution of this with two of the three major segments of the American economic life: businesses and consumers. When we see the government start to pay down debt and when the federal budget going forward will not have a negative effect on the dollar’s value, we will have a long-term market recovery, as well as an economic recovery.
Where Eley sees opportunities for investors: corporate bonds and utilities, healthcare, and energy stocks
Daniel Holland
Equity Analyst, Industrial Team
Morningstar Research Inc.
A: Yes
Any sign that the financial companies are getting healthier and stronger is good for the overall economy. The bounce in the market over the last five weeks has definitely been the result of stronger earnings expectations coming out of the financial sector. Whether or not it is a sustainable market rally really depends on how strong the banks will be going forward. That’s the key piece.
Things also are starting to get better for companies that have exposure to infrastructure –roads and bridges. It’s hard to pinpoint when the market will be bullish again. There are so many behavioral aspects to it. But some of the best indicators are earnings. On a macro level, I look at corporate profits. I look at volumes in terms of products that were shipped. Other leading indicators are consumer spending and employment. I’m more geared toward looking at the fundamentals that are driving companies, and thinking less about market fluctuations. I think more about how companies’ balance sheets and income statements are faring. There are still plenty of opportunities out there in the marketplace for investors. It’s not like the run is over. I would tilt more toward companies that make parts in places where the government is trying to stimulate the economy.
Where Holland sees opportunities for investors: energy, industrial companies
Eric McKissack
CEO and Chief Investment Officer
Channing Capital Management
A: Yes
Last year we had a couple of rally periods and then the market went into sort of doom and gloom. But now we have more of the federal programs enunciated and we are seeing some signs of bottoming out in terms of microeconomic reports. The panic has passed. A lot of stocks were beaten up irrationally beyond any kind of valuation. Logic has rebounded.
We won’t see the market go back to its lowest levels. But I do believe that it is possible as we go through these earnings seasons, we could see some retrenchment in the market. The timetable for the economic recovery that is needed is still uncertain. But these five weeks of recovery in the market is a good sign that the worst is over.
Because of the unusual nature of the downturn we have witnessed, consumer and investors confidence is a huge factor. Microeconomic data is still coming out negative about jobs and the like. It is unclear when that is going to turn. People are looking for signs of stability. One way to think about it is to wait for the unemployment data to show a flattening and housing activity to show a flattening. Before things get better and start to grow we will see that the numbers aren’t getting worst. The market will be well within its recovery phase before we see jobs coming back really strong.
Where McKissack sees opportunities for investors: financial and consumer discretionary companies
Theodore L. Parrish
Principal and Director of Investments, Co-Portfolio Manager, Henssler Equity Fund
The Henssler Financial Group
A: Yes
We’re seeing some favorable signs of stability. I’m just hoping it’s here to stay. We have a lot of stimulus pumped into the market, so sooner or later it will gain traction. The key thing with the current momentum will be earnings reports that come out in the next couple of weeks. We had policy decisions that started out anti-market but are now more pro-market coming from politicians and the Obama Administration. We’ve seen a few companies that came out with numbers that surprised us, especially in the financial sector. Things that have hurt the bottom line for a lot of financial stocks in the past couple of years–such as the write-offs they incurred–are starting to reverse a little. That was the sector that pulled us into this mess, so they can lead us out.
If we get companies reporting better earnings along with improved economic data, the market will continue to go up. Things are bad but not as bad as we thought. There is some light at the end of the tunnel. The market is signaling that it may recover soon if we do not have any major catastrophes in the financial sector. I don’t think that will happen. We will have a sustainable recovery in the stock market–and the economy.
Where Parrish sees opportunities for investors: consumer cyclicals, industrials, and infrastructure (roads, bridges and energy) playsJoseph Sterling
Portfolio Manager
American Century Investment Management Inc.
A: No
This is not a sustainable market rally. We’re probably in what one would consider a bear market rally. These types of rallies are not usually over until you retest the lows. Before you can see the market bounce back to permanent recovery, you will have to see some positive conclusion from the things the Administration is doing with the banks. You will probably have to see the Federal Reserve start to drain some of the aid in liquidity that they have put into the system. You have to see if the markets’ appetite for risk comes back. Another good sign is when the credit markets start to function more smoothly. Once all that happens, you can point to a stronger economic condition which would bode well for the market going forward.
Where Sterling sees opportunities for investors: Energy, gas, and electric utilities
Jason Tyler
Senior Vice President
Ariel Investments
A: Yes
When the S&P got down to between 680 and 690 that was obviously a period when the market was oversold. We are getting to a period where the economy isn’t in great shape yet, but investors are starting to exhibit less fear around what the future of the stock market is going to look like. Unemployment is still increasing but not at a dramatic rate. Drastically increasing unemployment makes investors worry about what corporate earnings are going to look like. That’s an important indicator as is consumer confidence.
Wells Fargo announced good earnings and the market rallied very strongly on that news. Financial stocks were up 70% overall. That was a significant one-day increase from just one company reporting good earnings. I think that is a sign that there has been so much fear in the market that even moderately good news goes a long way to changing investor behavior. Where you
get glimmers of companies that are doing well–or not as bad as expected–that will have the stock market doing a lot better, even if the overall economy is not doing great. The second half of this year, we may see the stock market rally significantly higher than it is right now. If unemployment is down and consumer confidence is up, investors will get bullish again.Where Tyler sees opportunities for investors: retail and financial services companies
Wayne Weddington
Former Senior Trader, Caxton Associates
Author of Do it Yourself Hedge Funds
A: No
Investors should get away from the ebbs and flows of the stock market right now. There’s a whole lot of volatility. There are factors driving stock movements that have a lot to do with other things than fundamental analysis. People don’t have any clue as to how close to a complete collapse of our capitalist system we came to at the end of 2008. Rallies do happen when there is a secular decline in the market. The best thing is not to be reactive to short-term stock performance. The best thing is to think about where the opportunities really are.
Certainly the health of the financial markets is tied to an economic recovery. But a lot of what you have seen as advancement in the sector has to do with a change in the accounting rules as to how these institutions mark their books. So, what was considered a loss a year ago is now potentially a gain depending on how they mark their own portfolios. Investors should look at some of these earnings reports from the financial sector with a skeptical eye. To distinguish between a market recovery and an economic recovery comes down to cash flow and earnings. I don’t think any economist would suggest that earnings right now are sufficiently robust enough to warrant continued advancement in stocks.
Where Weddington sees opportunities for investors: corporate bonds, art, metals, and real estate