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Beyond Market Turbulence
As a follow-up to my last comment, David Parkinson of the Globe & Mail reports, Despite the turbulence, strategists stay bullish:
The sight of slumping stock prices hasn’t shaken most market strategists’ confidence that the bull market still has further to fly. But they warn investors to buckle up – we could be in for plenty of turbulence.
In the wake of a selloff that has knocked the U.S. benchmark S&P 500 stock index into official “correction” territory (a drop of more than 10 per cent) in the space of a month while lopping 7 per cent off Canada’s S&P/TSX composite, strategists on Wall and Bay streets are reminding clients that the size of this correction is nothing out of the ordinary in a post-recession bull market. What’s more, they insist that the selling is being driven by fear rather than fundamentals – meaning that markets with solid growth prospects are merely getting cheaper and creating buying opportunities.
“It is difficult to be very bearish of corporate assets when growth is reasonably strong, inflation is low, margins are expanding, monetary policies are easy, and valuations are undemanding,” said economist Larry Hatheway of UBS Ltd. in London.
“In the first four months of this year, investors had become increasingly complacent to risk,” he said. “This was a market vulnerable to correction – all that was missing was a catalyst.”
However, that catalyst – a major sovereign-debt scare out of Europe – has re-awakened investors’ hyper-sensitivity to risk, a lingering effect of the credit crisis of 2008-09. The depth and speed of this risk adjustment does suggest that even if stocks can track generally higher in the coming months, they may do so in a very moody, volatile way.
“People are now a lot faster on the trigger in reducing risk. This increased volatility could be a byproduct of a new way of managing portfolios,” said Stéfane Marion, chief strategist at National Bank Financial in Montreal.
“But we have to keep things in perspective. We haven’t yet seen the collateral damage [from the European debt woes] that would upset global growth.
“In a world where credit markets remain functional, I don’t think the amount of selling we’ve seen can be justified,” he said. “The valuations we have right now are very reasonable.”
George Vasic, chief strategist for UBS Securities Canada Inc., noted in a research report that over the past 50 years, post-bear-market rallies on the Toronto Stock Exchange have all been met with corrections on the scale of what we’ve seen recently; the average pullback has been 13 per cent. Similarly, Pierre Lapointe, global macro strategist at Brockhouse & Cooper Inc. in Montreal, said the S&P 500 has routinely rallied in the year after the end of a recession, yet those rallies have all included a considerable correction within them, averaging 17 per cent.
“The next few months will remain volatile, but history tells us that the year that follows a recession is usually very profitable for equities,” said Mr. Lapointe, who reiterated his overweight recommendation on global equities.
David Bianco, chief U.S. equity strategist at Bank of America-Merrill Lynch in New York, is among several strategists who issued research notes in the past few days reiterating their earnings and stock-index targets over the next 12 to 18 months. His 12-month target for the S&P 500 remains at 1,350, a whopping 25 per cent above Tuesday’s closing levels.
He said the current S&P 500 levels imply a price-to-earnings multiple of about 12 times, far below the historical norm of 15 times. At normal P/Es, current levels are pricing in S&P 500 earnings of just $72 (U.S.) a share for 2011 – almost 20 per cent below Mr. Bianco’s “base-case” forecast, and toward the low end of his worst-case projections in the case of another global recession.
“Times like this make it clear that the risk equity premium is no free lunch, and volatility is gut-wrenching, even for the most long-term investors,” he said. “[But] we believe the best way to feel better during a correction is to buy some shares.”
I think volatility is here to stay. Itchy traders selling at the first sign of weakness, memories of 2008, and way too much risk management stifling the large portfolios, forcing managers to cut positions when the VIX rises, are all wreaking havoc on markets. Add to this market disinformation usually spread by large investment houses or their large hedge fund clients looking to capitalize on volatility, and you come away thinking that maybe the month of May was a harbinger of things to come.
But the reality is that US fundamentals have turned the corner. Allan Robinson of the Globe & Mail reports, U.S. consumers could give global stocks a lift:
The bull market needs some fuel and that will come once the U.S. jobs picture improves, incomes start to rise and consumer spending revives, strategists say.
“History tells us that a peak in the U.S. unemployment rate has the potential to sustain the equity rally – globally,” said Pierre Lapointe, a global macro strategist with Brockhouse Cooper. “We have calculated that every time the unemployment rate peaks after a business cycle, the post-recession global rally gets a second wind.”
Basically, investors bet on a recovery. “Investors realize if the jobs market gets better that means consumers will start spending again and that means profits down the road,” Mr. Lapointe said.
What is the market looking for now?
After three solid months of increased spending, economists are looking for consumers to take a breather and investors may need to be patient. Personal spending data scheduled for release Friday is forecast to have increased 0.3 per cent during April, compared with a lofty 0.6 per cent rise in March, according to a survey of economists by Bloomberg.
On the plus side, personal income is expected to have crept higher rising 0.4 per cent in April, compared with 0.3 per cent in March.
Another positive for U.S. consumers is that they have had no reason to be worried about rising prices. The personal consumption expenditures inflation data, known as the PCE deflator, measure price changes for a broad range of goods and services, excluding food and energy. The deflator also due out Friday is forecast to have declined to a 47-year low of 1.1 per cent in April, well below the U.S. Federal Reserve Board’s long-run forecast of 1.7 per cent to 2 per cent, according to BMO Nesbitt Burns Inc.
“The sharp turnaround in the labour market in recent months suggests that incomes will soon start to rise more significantly,” said Paul Dales, the U.S. economist for Capital Economics Ltd. “This will allow households to raise their savings rate without too much of a slowdown in consumption growth,” he said.
How will the market react?
So far stock markets have not reflected that bullish scenario. Investors have been preoccupied with sovereign risks concerns, which has driven stock markets lower. Last week the VIX, a measure of equity volatility, soared to 45.79 but this week it plunged to about 30.
“Only on five occasions in the past 25 years has the VIX reached such heights,” said Carmine Grigoli, chief investment strategist with Mizuho Securities USA Inc. Such elevated readings suggest emotional selling and on average the stock market has jumped 26 per cent in the following year.
And Brockhouse Cooper’s Mr. Lapointe said that on average six months after U.S. unemployment levels peak (in October, 2009) global markets increased 9.4 per cent, compared with the recent 1.1-per-cent decline. “One year after the unemployment rate peak, global equities were up 17 per cent on average,” he said.
It's easy to get all flustered in these markets. With volatility on the rise, more uncertainty over Europe's future, stocks coming off one of the worst months, it's no wonder everyone is pessimistic and bearish.
But if you look beyond the turbulence, and focus on the improving fundamentals, then a different picture emerges. To be sure, the big beta moves of 2009 are over, but going forward, there will be money to be made if you pick your stocks and sectors right. That much I'm sure of.
Below, William Greiner, chief investment officer at Scout Investment Advisors, talks with Bloomberg's Matt Miller and Carol Massar about the outlook for U.S. inflation. Greiner also discusses the outlook for U.S. stocks, corporate earnings and Europe's financial crisis.
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His follow up will be the posting of some near nekkid wimin. That eye-candy is supposed to soothe the angry beast of rebuttal comments.
And notice the non-coincidental congruity there: marshmallow Peep Leo .... eye candy .....
No, no, no akak
Leo is a comedian. He is just having us on.
That may be --- but it is in rather poor taste to walk into the hospital room of a terminally-ill patient and joke about their health.
Of course we should ignore the fact that the improving fundamentals are the result of deficit spending at 11% GDP - it's of no consequence. We can sustain that kind of stimulus forever, blue skies I tell ya, blue skies!
Don't try arguing facts or logic with Leo --- it's up, Up, UP with the market! Blue skies, rainbows and lollipops as far as the eye can see! Don't bother me with the inconvenient truth, I'm too busy speading Pollyanish disinformation in the finest tradition of CNBC!
This entire thread is a complete waste of time, except for once again displaying the wholesale and insulting rose-colored lunacy that is Leo Kolivakis.
Leo, you are the marshmallow Peep of ZeroHedge --- colorful and nicely packaged, but sickly sweet, mostly fluff and disappointingly full of air.
Look out! Don't make the Marshmallow Man angry. You will be crushed.
Nah, this is more like Leo --- we all know how he likes his Peep shows:
http://blog.oregonlive.com/tailgate/2008/03/large_ultimate_peep_show.jpg
Leo, please gives us a list of improving fundamentals. Also, please explain why we have ZIRP and dollar swap lines if the fundamentals are improving. According to Biden, weren't we supposed to have 500k new jobs created per month for at least the last 2 months? Why are initial claims still high? Why have tax receipts picked back up?
Cursive, you are an idiot.
We have ZIRP so that we can get easy capital access for Solar Companies. Millions of jobs have been created by Solar Companies but the due to the secret nature of the new technology these are kept hidden from the public..
Tax receipts are quite high but the Government understates them to reinvest the money in Solar companies.
Not saying I'm the best and brightest but I really think I would be more wealthy if I were a little dumber. :-0
Dont even go there brother, I can speak with some authority here I can assure you "dumb" is very hard on your income. Leo is not dumb. He is an idiot able to cut and paste and blissfully ignore the facts that do not suit him.
Mav
gotta luv ya
I am buying Chinese solars when I am feeling dippy
Sharp turnaround in the labor market? Rising incomes? LOL. I wish I could live on planet fed, where the printing presses run all day and CPI is rigorously scrubbed of inflation. No rise in prices, there. Unfortunately I live in the real world,where I haven't had a raise in four years, where the price of gas is up 38% from a year ago:
http://www.bls.gov/news.release/cpi.nr0.htm
and a bag of oranges at wal-mart just cost me $8.
Someone should beat the Fed heads with a bag of oranges...
Sam's Wholesale sells bananas by the 2lb lot. 2 years ago they were 99 cents per lot. Now the cost fluctuates from $1.49 to $1.79 per lot. I like bananas. Do any of these folks actually eat or use gasoline (I mean that they pump themselves and watch the little dials go around)? I think not.
Little dials go 'round? Just where on earth, or elsewhere, do you live?
It's not literal, it's imagery. Think of it as poetic license.
Do your gas pumps not have volume and price indicator dials?
Granted, many are digital now, but not all.
No doubt.
Inflation is dead.
Ben is free to print to infinity. It will take years before "inflation expectations" start worrying the Fed.
This Market's moves are not CLOSE to over.
The entire SOB is going over a cliff SOON.
We will see 8000, or less before the end of the year.There is nothing substantitive holding this whore up.
PM's will be hit hard, and Hyperinflation is 2-3 yrs down the road.
So, if you have PM's, and want to hold that long, or snag profits now, buy back at 33% less your choice.
( all this based on NO major wars, or Black Swan events)...IMHO.
See Mr.Williams warning here...........Shadow Stats.
http://jsmineset.com/
dupe
Fed inflation expectations = the cost of swiss ski chalets plus gulfstream leases divided by the cost of a round at pebble beach. No inflation measured, carry on.
"strategists are bullish" is valuable information--sell and buy some gold.
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