Will the Same Cycle Repeat Itself?

Ahead of the Street Column, by Mitchell Clark, B. Comm.

Anything could happen to the stock market over the coming weeks — anything. That’s why it’s kind of a difficult time to be considering new positions. For a lot of investors, earnings season is the time to confirm an existing holding or to see if a position you’re watching is worthy of investment. There’s a lot of uncertainty, of course, and the market seems to be having an identity crisis.

I’m of the belief that there’s no need to take any new action right now. The outlook for individual companies is just too uncertain and so are the prospects for the stock market. We’re still in a bear market and unemployment is still going up. The market has been and is currently speculating on a future that doesn’t seem likely to me. I suppose it’s because fund managers are paid to invest their clients’ money.

Employment is one of the most important indicators to keep an eye on going forward. If the unemployment rate turns around, then there’s potential for the bear market in stocks to be over. I’m of the belief that, even if corporate earnings turn out to be amazingly strong in the second quarter, investor sentiment won’t be able to get past the feeling that there are rough times still to come. I’m not bearish about the future; I’m only trying to be realistic.

Advertisement

Government debt levels are really starting to bother me and I can’t escape this feeling that the long-run outlook for the economy isn’t great. Sooner or later, the government is going to have to act like a responsible citizen. These huge budget deficits can’t go on forever. Eventually, we all have to live within our means.

While individuals and consumers have changed their behavior to better reflect their income levels, governments around the world are doing the opposite. It all helps make the case for rising interest rates down the road, which will only serve to hold back economic growth over the coming years. I hope this vicious cycle doesn’t pan out, but, without question, it’s a definite possibility.

At its current level, the S&P 500 Index has to rise about 67% just to get back to where it was before the broader market started to deteriorate in mid-2007. Previous to this level, it took the stock market about seven years to recover from the same high set just before the technology bubble burst at the beginning of this decade. Right now, I’m thinking that history is going to repeat itself.