Tana Focke, manager of the North American fund at Smith & Williamson Investment Management The mark...
Tana Focke, manager of the North American fund at Smith & Williamson Investment Management
The market had to absorb a lot of bad news in January including the Argentine crisis, the collapse of Enron and Global Crossing, the suggestions over improper accounting at Tyco, the large losses at AIB and some very poor earnings.
However, sentiment has held up well and so has the consumer. There are also signs the economy may be improving.
The fall in industrial production in the manufacturing area was 0.1% in December, compared to 0.2% in November.
The first indication of rising activity since November 2000 was seen in the Philadelphia Fed Index, which showed shipments up 14.4% in January compared to a fall of 12.2% in December. New orders were up 12.6%.
Stock valuations are still high and the yield on the market low, as measured by historical data and the P/E to growth rate, is higher than in 1987.
The consensus forecast for the S&P 500 is that profits will rise by 14% this year, which seems much too high.
Expectations will have to come down to lower levels as earnings for the first and second quarters are reported.
This is one of the reasons it is difficult to be unrestrainedly bullish at present. However, recessions seldom last longer than two years and the market always turns before the recession is over.
President Bush and Mr Greenspan have given support to the market and the effects of the proposed tax cuts and increase in the defence budget have not yet flowed through to earnings.
If the Federal Reserve decides to increase interest rates, it will be a sign that, in its view, the recession has come to an end and the economy is recovering.
The bad news was counteracted by the encouragement to consumers to buy cars on 0% financing. The surge in durable goods in the fourth quarter was 38.4% at an annual rate.
Lower mortgage rates have allowed the consumer to refinance and spend. The rise in consumer durables contributed 2.78% to GDP and government programs added 1.04%.
The overall result was a decline of 3.6% because the other components of domestic demand were down.
Fear of terrorist attacks or an international banking crisis will continue to cause nervousness in the market. In addition, there are economists who believe we may be entering a sustained period of deflation.
This would be worrying and hopefully it will not come about as the Government would lose its ability to stimulate or depress the economy by raising or lowering interest rates.
In spite of all the bear points, it is not a time to be left on the sidelines. Market timing has been shown to be an ineffective tool over a long period.
Good quality stocks with strong earnings and balance sheets should show good price appreciation over the next year to 18 months.
Economy looks to be picking up.
Inflation is under control.
Confidence levels are high.
We may be entering a period of deflation.
More disappointing earnings possible.
Real valuations still high.
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