Market Pulse: The song remains the same…
November 5, 2014
Triple-digit declines day after day soon morphed into triple-digit gains. In just 11-days the S&P 500 recovered from its 19-day and nearly 10 percent decline.
So much for the theory that the market falls faster than it rises. Why the quick recovery?
I recently wrote how earnings an interest rates point to higher stock prices. Operating earnings will grow 6-8 percent next year and real GDP growth will be 3 percent, give or take. Interest rates are low, and when they rise they won't rise far.
Then there is a practical reason to be optimistic. Investors need to put money to work. Individuals, institutions, pension funds, professionals, and hedge funds have that in common.
Selling stocks that pay dividends and junk bonds and others that pay interest to hold cash that pays nothing is not a Phi Beta Kappa investment strategy. It's not an investment strategy at all.
Bear markets begin amid rising interest rates, increasing inflation, a deteriorating economic outlook ahead of a recession or slowdown, falling earnings and an inverted yield curve.
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They also come when stocks are grossly overvalued (think 2000). No sign of those now nor are they on the horizon.
In fact, earnings are improving, deflation, not inflation, could be a more likely problem, interest rates aren't rising and won't be, and stocks are at historically average valuations.
Bear markets also begin with deteriorating market participation. When the S&P 500 reached its high on September 18, only 19 percent of stocks were near their highs. That was a problem.
When the S&P 500 equaled that high last Friday, however, 30 percent of stocks were near their highs. Participation is much improved.
I haven't changed my position. Clear-thinking investors with an adequate time frame will choose dividend-paying (and raising) stocks for the same reason they've been buying utilities.
A better pay off for T-bills, bank accounts and money-market funds is so far over the horizon that they are off the table.
Forget long-term Treasurys with their token yields, and by all means forget gold and silver. Only stocks offer income and upside potential.
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.
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