Gone Fishing — Stocks Are Priced Where They Should Be

It won’t be long until we have another earnings season to go on. If Europe or China doesn’t disintegrate over the next month or so, then investors will have a lot more good news to go on. In the short term, the fundamentals do exist for solid earnings growth in the second quarter. In the absence of corporate results, investors will continue to focus on all the bad news.
The marketplace is already expecting robust earnings, but the current trading action in stocks reflects lackluster sentiment that’s caught in a loop of declining expectations. Debt woes and commodity price weakness are feeding the view that future economic growth will be very modest this year and next. Without any hard data to suggest otherwise, stocks seem to be priced where they should be.
And so, there’s nothing to jump on in this market. In fact, there don’t seem to be any screaming buys in any capital market, be it currencies, bonds or commodities. Of course, there’s nothing wrong with this scenario. If you like the buy-low-and-sell-high investment strategy, then you’re almost always in a waiting game, looking for securities to be priced at extremes. This strategy works for stocks, real estate and other things, but it takes a while for the bargains to present themselves. In the absence of very attractively priced assets, you do nothing.I think stocks have another chance to accelerate this year, but only as part of a long period of consolidation around Dow 11,000. Without dividends, investment returns from equities are likely to be very modest over the next several years, reflecting lackluster economic growth in developed countriesThe right shoulder formation of the Dow Jones Industrial Average continues to look ominous to me and, while this is an unscientific technical worry, I have a difficult time getting past the visual representation of the price data over the last 12 years. To me, the historical data represented in chart form suggest an extended period of equity price consolidation.