It looks like the current trading action in stocks is the correction/consolidation that we should have had earlier in the year. Investor sentiment was perhaps too optimistic and economic reality has now caught up to the marketplace.
The only things that investors really care about are the numbers, and in those numbers they want to see growth. Investors sell when businesses aren’t growing and they even sell when business remains the same. The reality of a slow growth economy is now settling in and, no matter what the government or Fed does now, the economy is on its own.
We’re likely to get continued weakness in stocks until we get into second-quarter earnings season. If those numbers are bad, then stocks would be in serious trouble. The good news is that expectations for the second quarter remain quite solid. Not all industries are experiencing the same level of economic activity, and that’s to be expected. With this backdrop, however, it’s pretty reasonable to conclude that the equity market won’t be taking off anytime soon, which is a simple reflection of the current state of things.
As mentioned in this column many times over the last several months, there’s no rush for investors to be taking on new positions, especially at the speculative end of the market. Stock picking is much more difficult in a slow growth environment and the returns from speculating on corporate events are less robust in a bear market. From my perspective, we’re still in a bear market for stocks and the S&P 500 Index still hasn’t achieved the same level that it was trading at over 10 years ago.
Faster-growing economies like China and Brazil are what are keeping the earnings growing at large corporations. Without these emerging operations, the earnings results from S&P 500 companies would be a lot different. Because the world’s mature economies are growing slowly and the U.S. economy still has to work through the housing crisis, I think the stock market is experiencing the same kind of pattern it did from the mid-1960s to 1980. We’ve already been into the current stock market consolidation for a good 10 years now and there’s more to go. It’s one big trading range that, without dividends, would have meant negative investment returns from stocks.
Since last September, most investable assets have gone up significantly in price. Stocks, oil and gold have all been due for a correction because of that run-up. What the market is going through now is a reality check and a reminder that economic growth can’t be manufactured or engineered. The economy is still in the process of balancing itself out after a bubble period in housing. Once this situation is fixed, the economy will start growing again in a meaningful way.