Tahoe Market Pulse: It’s time for a few reality checks
February 11, 2015
Stocks are up or down 100 points or more most days, and more often than not there isn't an obvious catalyst in the news or the global financial markets to explain the volatility. Investors are facing some unpleasant realities.
Reality number one: Fourth-quarter earnings for many high-profile companies were weak and the first quarter will be no better.
Caterpillar, Microsoft, Procter & Gamble, IBM and DuPont — all stocks in the Dow Jones Industrial Average — disappointed and management wasn't optimistic for the year ahead.
Most cited one reason for the weakness, which is reality number two: There is both upside and downside from the dollar's strength.
The cost of foreign travel has fallen and imported goods cost less.That's the upside. But American companies with overseas operations (40 percent of sales for S&P 500 companies) must convert their foreign revenues back to dollars.
Those revenues now convert to fewer dollars than they did months ago (the downside), so sales and earnings look a little smaller.
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Reality number three: The economic news for now doesn't signal more than a modest acceleration in GDP growth.
Jobs are being created, but consumer spending fell in December and the manufacturing sector had its worst reading in a year.
S&P earnings this year will not be quite as strong as had been expected (6-8 percent growth) and that means stocks are not as attractively valued as they appeared a few months ago.
While the above are valid reasons to temper one's bullishness based on valuations, that doesn't mean stocks will fall more than a little.
Why is that? The reason is reality number four: Money has to go somewhere. With few exceptions, alternatives to stocks — bonds, cash equivalents, commodities, real estate — are unattractive and will remain so.
Morgan Stanley now expects the first rate increase to occur in March of next year due to global weakness, the dollar's surge, low inflation, etc.
If they are right and rates begin to rise more than a year from now, an acceptable return in money-market funds, CDs and T-bills will be years off.
In the futures market for fed funds the rate reaches all of 2 percent in 2018.More than three years out?
Two percent? Yikes! Financial assets of all kinds must be adjusted to reflect the reality that historically normal and more attractive returns won't be back for years. Hello stocks.
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.