Market Pulse: I’m still a bull
November 6, 2013
The talk of default and government shutdown seems like a distant memory. Economic reports covering this period will be disappointing, but the economy will bounce back to its slow-growth mode.
Whatever damage the circus in Washington did to the stock market was quickly undone. At its worst the S&P was off four percent. It has since reached a new high.
Stronger still is the Russell 2000, a measure of small-cap stocks, which is up 30 percent this year.
Third quarter earnings season is winding down. Like most every quarter, most earnings reports beat estimates … but not by much.
Fortunately, third quarter earnings were very good for the three stocks I listed in the October 17 article on income investments.
Since, BP Plc (BP) is up 8.2 percent, AT&T (T) is up 5.2 percent, and Spectra Energy (SE) 1 percent.
While earnings and the outlook are normally driving forces for the market, these are not normal times. The Federal Reserve, through its QE programs and rock-bottom interest rates, has distorted the market and driven asset prices higher.
After all, if cash, CDs, T-bills and money-market funds pay next to nothing, investors with literally trillions of dollars earning a token on the sidelines must look elsewhere. Commodities?
Not realistic for most. Bonds and preferreds? Yes, some are attractive but they are strictly for income, not growth. So investors bought stocks.
They did, and they will continue to buy. So I'll say it once again. As long as short-term rates stay low (at least a few years), stocks will work their way higher and higher with brief and shallow periods of profit-taking.
Rates can remain low because inflation is under the Fed's 2 percent target. Oil prices are falling as the U.S. moves toward energy independence.
Economic growth of 2 percent, inflation of 1 percent, and a falling current account deficit is good for stocks.
Pay no attention to the pundits who talk of bubbles. Dramatic predictions and collapses gain attention and there are always those who insist that what is happening in the real world shouldn't be happening in theory.
A forecast of slow growth with low inflation, stable bond prices and rising stock prices is less dramatic but far more realistic. In the real world, thanks to the Fed, financial assets have done well and they will do well.
Put another way, stocks are the best house in the best neighborhood.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.