The recent stock market selloff was due to the U.S. Federal Reserve saying that the domestic economy faces some serious challenges over the next year. The central bank didn’t take much in the way of new policy action, because there isn’t much left their toolbox. Interest rates can’t go much lower; therefore, the economy is on its own.
I pretty much have the expectation that the U.S. economy is likely to produce little to no growth in gross domestic product (GDP) in the next two quarters. Investors, who already sold stocks after reducing their expectations for the future, have now had to do the same thing again.
Given the earnings picture, I still view the stock market as very fairly valued at this time. Commodities (precious metals in particular) are now experiencing a well-deserved price correction and this makes for an opportune time to be considering new positions in resources.
One of the few industry sectors to be generating any material growth in revenue and earnings is resource-related, and now is a great time for contrarians to step up to the plate.
It’s really quite amazing for the spot price of oil to be trading below $80.00 a barrel. The spot price of oil continues to be the barometer for financial markets and speculators are betting that the global economy will be in a greater rut than previously expected. But with this reality, a lot of growing oil and gas companies are cheaply valued…and I think investors can be buying right now. I also like the longer-run prospects for silver, which hasn’t traded commensurately with gold.
Investor sentiment is likely to improve when third-quarter earnings season begins. The financials usually report early on, so there could be a shaky start. One of the things that non-resource corporations are doing is sitting on their cash. Big companies are acting just like stock market investors—they’re afraid to make new investments, because the outlook is so uncertain.
All in all, it’s a tough time to be an investor in anything. Investment risk is very high for everything but cash. One of the big issues that has to be addressed before corporations and investors feel confident about making new investments is the sovereign debt issue in Europe. Financial markets need to see a concrete plan to get out of the current mess and a timetable for the execution of such a strategy. Only with certainty will all the money sitting on the sidelines be put to work.
At this time, a lot of well-managed, large-cap companies are seeing their share prices now well off their highs. It happened very fast. Yields have gone up and the opportunities for long-term investors are getting much more attractive. We’re in a wait-and-see market, with little expectation for capital gains.