The U.S. stock market can go up with a lackluster Main Street economy because of better investor sentiment, earnings growth, and fair valuations. Stocks don’t need a lot of good economic news to tick higher; investor sentiment is strong enough and institutional investors want to be buyers. Any news showing economic growth is good enough for this market, and that’s a big change from last year.
The S&P 500 Index is forming a new base with 1,300 as the floor so far this year. It will likely test this level, but it’s a good sign if it can stay above it. The stock market’s trading volume has been weak, but this isn’t a big surprise considering the amount of investment risk in the global marketplace and an uninspiring outlook.
Short-term, the stock market can tick higher; perhaps for the first half of the year. There is the solid expectation for about 10% earnings growth this year. So, as long as investor sentiment doesn’t change, stock market action should continue to be positive.
There’s recently been a change in investor sentiment regarding precious metals. The spot prices of gold and silver have been improving and their recent price consolidation could be over. Gold stocks have been under quite a bit of pressure since the beginning of December last year. Their current resurgence mimics the action in the spot price.
I’m still not that bullish about the stock market for the next several years. While I prefer higher dividend paying stocks for the income, as a strategy, I’d rather overweight gold. Corporations are very healthy right now and valuations are reasonable. Still, in this new age of austerity, I don’t see where the Main Street growth is going to come from. Investor sentiment should be strong enough for the current bear market rally to complete the right should formation of the main stock market indices. But the fundamental problems in the U.S. and European economies remain—the big problem being sovereign debt. This issue isn’t being addressed, especially in the U.S. due to this year’s Presidential race. This is a big worry for me, because of all its potential influence: zero growth; inflation; government shutdowns; downgrades; defaults, etc. The age of austerity is upon us and I think the sovereign debt crisis will tighten its grip next year. (See The Policies We Have Today Will Hurt Us Tomorrow.)
For now, investor sentiment is experiencing a well-deserved upswing. There’s lots of good news in the U.S. economy, but it’s not trickling down to Main Street. Progress, or growth, is mostly being experienced by the industrial economy, which is now a smaller portion of GDP.
As I’ve been writing, short-term, the stock market is looking okay, with investor sentiment, corporate earnings, and a fair valuation all helping out. This year should pan out, but I’m worried about the next couple of years after the election.