When companies want to raise funds, they sell shares to investors. When these shares trade on an exchange, the public can buy into these companies and become shareholders. Investing in stocks is a way for investors to participate in the growth of companies and the economy as a whole. Wealth is ultimately generated from owning shares of valuable businesses, not earning a paycheck. Through careful analysis, investors can own and participate in growing businesses as part owners. Of course, as in any business, success is not guaranteed and thorough research must be conducted before any investment is made.
While the economic data have continued to come in worse, the S&P 500 has strengthened over the past few months. What is the stock analysis that can justify such a move, and is it sustainable? These two questions are critical for those interested in investing in stocks. There are several reasons for why the S&P 500 is at current levels, and it starts with how stock analysis is conducted.
The first thing to remember when investing in stocks is that the market is a forward-looking mechanism. That means that the current economic environment is not as important as what will happen 6–12 months or more into the future. Proper stock analysis needs to take this into account and try to understand where the winds will be shifting.
Another way to conduct stock analysis is to take a look at the Volatility Index (VIX). The VIX is a gauge of how much volatility there is in the market. Generally speaking, when the volatility is low, stocks are moving up in a slow fashion, while spikes in volatility coincide with market crashes.
Chart courtesy of www.StockCharts.com.
This chart shows the S&P 500 overlaid with the VIX over a three-year weekly view. What basic stock analysis will tell you is that periods of low volatility have been quickly met with violent moves down in the market. Investing in stocks is difficult enough as it is, but this chart clearly shows that when the market is at its most quiet, that’s when investors should be alert to the possibility of a pullback.
Investing in stocks hasn’t been great over the last decade or so. The stock market is basically trading around the same level it was this time last year. It’s the same as it was in 2008, 2006, 2000, and 1999. Without dividends, you would have lost money owning the S&P 500 Index over the last 12 years due to inflation, which highlights how important it is to get the business cycle right if you are investing in stocks.
Of course, before the last dozen years or so, it was a golden time investing in stocks. Individual stock selection wasn’t even necessary to make big capital gains; you just needed to own the stock market through an index. The last half of the 1990s was a particularly great time for investing in stocks, as the Internet technology craze fueled a wild period of speculation. But if you strip away the bubbles and the bursts, I believe the stock market (as measured by the S&P 500 Index) today is following the natural progression of earnings growth. Ignoring the big swings, the stock market, in my opinion, is exactly where it should be.
Investing in stocks is all about getting the timing right, because the business cycle exists, and it’s very powerful. If you pull up a very long-term chart of the S&P 500 Index and strip away the huge volatility of the last dozen years, you’ll notice that the stock market, as measured by this index, is trading just a hair below its all-time record high. It’s the volatility in the stock market that’s been crazy over the last … Read More
The sovereign debt issue in Europe is a direct threat to the U.S. stock market. It’s been like this for the last year, and it is likely to stay like this well into 2012. Prior to the European sovereign debt crisis, U.S. equity investors didn’t really care about what was going on over there, but times change—and they change quickly. That’s the one certainty in the stock market these days. Time horizons for investor expectations always seem to be getting shorter and unusual events like the sovereign debt issue seem to have a lingering effect on investor sentiment.
The great reckoning that’s going on is all about debt and the ability of entities, be they individuals or countries, to live within their financial means. The stock market hasn’t traditionally spent much time worrying about sovereign debt for the simple reason that the limits to all this debt haven’t reached the breaking point up until only recently. Precipitated by the subprime mortgage meltdown, large financial institutions and entire countries are now being forced to deal with their lack of prudence. The end result is a stock market that’s completely unsure of the future.
As I’ve been writing, it’s my firm belief that, if the sovereign debt issue in Europe did not exist, the U.S. stock market would be quite a bit higher than its current level. And not only this; but there would be a lot more hope towards the future. The U.S. economy is by no means in full recovery, but there are positive signs out there. Eventually, a new business cycle will take hold and investors will … Read More
It’s pretty clear that the economy will be in a slow growth state for quite some time and the most important economic statistic to follow will be consumer spending. We know that the economy is going to be lackluster for the next several years, because government spending will continue to be reduced, putting pressure on any income growth. It’s the age of austerity and it’s going to last for quite a while.
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