The stock market is handling the world’s two recent crises very well. The story in Libya seems far from over and Japan’s terrible tragedy is a decades-long recovery, but domestic stock prices didn’t go down that much and it’s a testament to the strength of overall market sentiment. Investors still want this market to go higher and first-quarter earnings will be the catalyst.
In the bottom half of last year, big corporations began raising their prices for their goods and services without affecting demand. This trend is likely to continue in the upcoming reporting period and the great news about this small price inflation is that it will go right to the bottom line. Big companies are running about as lean as they can be and their pricing power will have a dramatic effect on consolidated earnings throughout the year.
That’s why it’s difficult to be bearish in the short term. Despite all the shocks to the system, we have very accommodative interest-rate policy, banks are more willing to lend to businesses and, while still weak, housing and employment markets seem stabilized. This is exactly the kind of platform required for a new business cycle.
One of the ongoing risks in global capital markets is what everyone calls “sovereign debt.” This issue relates to a country’s ability to service its national debt and annual deficits. Most Western nations have hit a wall in terms of the amount of debt they have on their books and countries like Ireland and Greece have had real trouble trying to meet their fiscal responsibilities. The sovereign debt issue is something that the United States faces and it’s the kind of risk that can have a cascading effect on currencies. And when currencies are in turmoil, make no mistake: your pocketbook is at risk.
So, this is an investment risk faced by all global investors, big and small. Nobody knows what might happen; whether some countries might actually default on their obligations or not. It’s something that investors have to keep in the back of their minds when they’re taking on new positions. Like a war or an earthquake, the current issues with sovereign debt have the potential to do significant damage to your portfolio in a very short period of time.
But getting back to the domestic equity market, the first quarter will very soon be at an end and another earnings season will begin. So far, we haven’t had much in the way of earnings preannouncements and that’s a very positive development for the near-term trading action. Stock prices have run significantly as you know, but I continue to feel confident about the S&P 500 Index hitting the 1,500 mark. It might even go further if employment improves.
The stock market’s been needing a correction or period of consolidation for quite some time. It’s looking like the market will quickly move beyond recent tragic events and focus on what companies are saying. For my money, the future for stocks remains bright.