by Alexander Green, Chief Investment Strategist, The Oxford Club
Monday, November 19, 2012: Issue #1907
Conservatives are disappointed about the outcome of the national elections. Investors are troubled about the recent volatility in the market. And just about everyone is skeptical about the outlook for the economy – and the Middle East.
But that doesn’t mean you should avoid owning shares of great companies – or move your money into low-yielding cash and bonds. There are plenty of good reasons this bull market can continue well into 2013 and beyond. Here are just 10 of them:
- You shouldn’t fight the Fed. We can argue about the proper role of the Federal Reserve or whether we ought to even have one. But history shows it doesn’t make sense to invest counter to the Central Bank when it is in an accommodative mode. And with the Fed buying up mortgage securities and long-term bonds to keep interest rates down, this is as accommodative as it gets.
- Short-term interest rates are zero. Hyper-low rates make it cheaper for businesses to borrow and easier for consumers to spend. They also make stocks attractive relative to cash and short-term bonds.
- Inflation is still M.I.A. Yes, I know, prices are up if you’re pumping gas, visiting a doctor, or putting a kid through college. But have you checked the price of a computer, a cell phone, or a flat-panel TV lately? Also, the biggest purchase most consumers ever make is a house – and those prices are definitely down.
- Housing prices have finally stabilized. There are plenty of pending foreclosures still, but take a closer look. Nationally, the average discount on a foreclosure in September was only 8% below market value, according to an analysis by Zillow. And many foreclosure sales are creating multiple bids. Clearly, housing is in a healing mode.
- Credit card debt is at a 10-year low. Still worried about overleveraged consumers? That’s so 2008. Debit card purchases are up. Visa and MasterCard balances are down. And American Express has seen loan balances fall 73% from the peak in early 2010.
- The energy revolution is underway. Utilities, factories and truck manufacturers are switching from oil to much cheaper natural gas. Slower growth in emerging markets is lessening the demand for crude, too. And technology-driven advances in everything from fracking to oil-sands development are also positive factors.
- Corporate balance sheets are pristine. The federal government is spending money like a sailor with four hours of shore leave. But it’s a very different situation with U.S. corporations. They have been paying down debt and refinancing it at lower levels. Plus, they are sitting on roughly $2 trillion in cash. Uncle Sam may be going broke. But U.S. blue chips are not.
- Corporate profits are at record levels. U.S.-based multinationals like Caterpillar, General Electric and Apple have decoupled from the sluggish U.S. economy. They are capitalizing on exciting new markets in China, India, Brazil and Russia. That won’t change anytime soon.
- Valuations are compelling, too. Historically, the S&P 500 has sold at 16 times trailing earnings. Today it sells for roughly 12 times earnings. There is plenty of value to be found in today’s market.
- The Santa Claus Rally and the January Effect. Yes, the trend hasn’t been so friendly since the national elections. But the correction in the Nasdaq and the near-correction in the Dow may be setting us up for what is historically the best seasonal performance for the stock market: early December to mid-January. Investors and traders often regret sitting his period out.
You may be bummed that Obama is still in the White House. But you should know that the stock market has performed as well under Democratic administrations as Republican ones. (And the Dow is up more than 75% since Obama took office.)
You may be bummed because the economy is still weak. But you should also understand that there is no short-term correlation between GDP growth and stock market performance. Perversely, stocks often rally during the bad times and sell off during the good. (The last three and a half years are a fine example of a weak economy presiding over a roaring stock market.)
In short, if you can’t be persuaded to invest in stocks during a period of zero interest rates, low inflation, record corporate profits, pristine balance sheets and cheap valuations, there’s probably not much I can say to change your mind.
Also, to be fair, there is one positive to sitting in cash during the most disrespected bull market in history and it’s this: If you reinvest those money market dividends each month, you will double your money in just 3,200 years.
Personally, I don’t like to think that long term. Plus, I plan on spending my money before then.