— by Mitchell Clark, B. Comm.
For the stock market, the future is always uncertain, but right now it needs that future to come as fast as it can. It could be a disaster, but the stock market needs first-quarter earnings season to give it the catalyst to move forward.
If earnings come in really bad and corporate visibility falls off a cliff, then it’s highly probable that the stock market will retest its recent lows. But, if the news isn’t as bad as expected, then this bear market rally has the potential to really sustain itself. In fact, it could be the beginning of a new bull market in itself.
If it’s one thing I put a lot of stock in (no pun intended), it’s the ability of corporate America to right itself relatively quickly. Stockholders demand nothing less. So, this means that the employment outlook for workers isn’t going to be good, because the economic marketplace demands that corporations hold onto whatever earnings they can. In a recession, where there is little to no top line growth, the only thing a company can do is cut its expenses to keep the ship sailing. So, even as employment numbers get worse, the stock market might actually do well, as bottom line earnings do as bad as the economy might suggest.
There is, then, the very real possibility that the stock market will go up as the Main Street economy continues to go down. This inverse relationship is pretty consistent throughout history and I think it’s a likely scenario this time around.
If it happens, it still may be a bear market rally, because I’m still very concerned about the long-run fundamentals for the economy. The risk of inflation is one that has the potential to create a long, sustained period of economic malaise. We may get out of the current recession only to experience another. The cycle of interest rate reductions will have to be reversed in order to try to control price inflation and, as we all know, rising interest rates can effectively kill economic growth. This has been the pattern in the past and I see no reason to suggest that history won’t repeat itself.
Obviously, I can’t predict the future and I don’t know if this scenario will pan out, but I don’t think you can ignore its possibility. You have to be prepared for it as an investor and a
So, as part of an equity portfolio, I think that outperformance will be achieved by focusing more on investments that will benefit from rising prices in the global economy. It’s still a bit early, but some exposure to commodities as part of a balanced portfolio will be key to outperforming in the future. And I’m not just talking about gold and oil. My bet is that agricultural commodities will be the next winners in the upcoming cycle.