I think it’s very reasonable to say that the stock market is fairly valued at this time. A lot of news, risks and revised expectations are now priced into the market and share prices reflect all the current information. There’s good value in many stocks at this time, but the question is: how long will they remain good values? Another month or perhaps another year? Nobody knows the answer.
Investors want to be buyers of stocks, but they lack the visibility necessary to pull the trigger. This lack of hope is a reflection of the Main Street economy and this sentiment should stay present for a quite a while longer, as the economy still tries to find itself a new equilibrium after the subprime mortgage meltdown. The housing market, jobs, incomes, and spending all require more time to correct themselves. The stock market now reflects the Main Street reality.
The spot price of gold is arguably due for a correction and I think this would be a healthy development for the long-run trend. I still see no reason why gold can’t hit $2,000 an ounce this year, and a little retreat in the spot price would be technically significant.
Agricultural commodities are trading on the weather and they can be considered to be robust price-wise with a solid outlook. The big unknown is the spot price of oil, which is now trading like a barometer on the global economy. The price of oil goes up if the economic news is good. But, just like interest rates, a lower oil price is directly stimulative to spending and the economy. Brent Crude oil is still trading at a significant premium to West Texas Intermediate mainly because of supply issues and the unrest inLibya. Predicting the future price of commodities is a very tough game, but I’d keep silver on your radar screen. It’s as good a bet on global economic recovery as anything.
In just over three weeks, the third quarter will be at an end and equity investors will turn their attention to what corporations are saying about their businesses. My read from second-quarter earnings season is that most companies are anticipating a solid bottom-year performance. There haven’t been any major earnings warnings for the upcoming third quarter, and that’s a positive development.
Right now, there’s no rush for investors to take any new bold action in stocks. I think we’ll continue to have this range-bound trading until earnings news hits the wires. There is good value out there, but I’d mostly wait for the latest information (including fourth-quarter visibility) before committing to some major new positions. The best stocks right now are the ones that pay dividends. It’s the only real return on investment with staying power.