It looks like that downside protection for stocks is going to come in handy. The economic data are catching up with investors and stock prices are behaving accordingly. Given the fundamentals and the outlook, it’s time to start paying serious attention to large-cap stocks. The timing isn’t right yet; but, if we get another major stock market correction, then a good buying opportunity will present itself.
The good news in this market concerns the rest of the world. Germany’s economy is improving and China’s economy is still strong no matter what the headlines say. Australia’s economy is solid. The global economy is experiencing decent growth and this will help pull us out of the doldrums when the timing is right.
Of course, the economy still has to find a new equilibrium for itself. You can’t have that much speculative excess in the system (culminated in the housing crisis) without taking years for it to correct itself. And, speaking of excess, we keep coming back to the same issue about the current state of things — debt. It’s an ugly beast that, frankly, is keeping everyone down.
We’ve been seeing a new trend in economic data over the last couple of quarters, which is that people are choosing not to spend. If there is extra money around, it isn’t going towards excessive consumption. In the near term, yes, this does have a detrimental effect on the economy. Long-term, however, this is precisely what we need to have happen. At the government level, fiscal discipline is out of control. Individually, the age of austerity is becoming apparent. It’s my hope that this trend continues and consumers choose to invest in debt reduction and their savings accounts before considering a batch of new clothes. It’s a simple formula that, in the long run, this economy needs.
Getting back to stocks, what we’ve seen in the first half of this year is a tremendous performance from big companies that have managed to squeeze almost every dollar out of their cost structures. This, on balance, has allowed for an impressive earnings performance so far. If the broader market has further downside (which my gut says it does), then the next bottom is worth paying close attention to. The economic cycle is going to reverse. It’s only a matter of time.