A whiff of optimism swept over Wall Street last week as the seesaw battle between good corporate earnings and bad moods raged on.
At mid-week, the stock indices soared on the heels of better than expected reports on manufacturing activity both in the United States and in China. Factory production in both countries is picking up, and that has a ripple effect on many other industries, such as transportation stocks, as well as construction companies.
For example, if there are more orders for a given product, more hours are worked, and at some point more trucks and planes deliver the finished product. That is exactly what is happening in many industries, and that is why profits are continuing to surge in most industries. Many market watchers think that perhaps the latest sell-off is over, and that, too, has many short sellers buying stock back to unwind their short positions. The net result is that the underlying forces that ultimately move stock markets are looking stronger.
Recent market statistics continue to point to a total disinterest in stocks by the small individual investor, but that ironically may be good news for the better informed. Because history has proven that small and independent investors are usually "Wrong Way Corrigans."
Witness the fact that since the beginning of 2008, stock mutual funds have had net outflows of nearly $245 billion. That contrasts with the net inflows of $616 billion into bond funds. The indisputable conclusion is that people sold stock funds as the markets were crashing, and therefore sold low. They have been buying bond funds with equal vigor as they rose to all time highs. Since the winds have not yet changed, the average investor feels safe where he is, yet those winds will soon change and much of those gains will evaporate in a heartbeat. One wag compared this situation to being inside a burning building with firefighters urging you to jump into their safety net, yet you are frozen with the fear of falling.
I recently returned from a quarterly review with the participants of a pension plan that we advise. We met with as many participants as we could, and answered their questions while giving our outlook for the coming months. This group, like any other, has members who fit across the entire spectrum of risk tolerance. My takeaway was that I was very proud how many of them "got it."
While talking about the difficult markets of the last few years, many remarked that they weren't retiring immediately and that they were buying shares at a discount through their biweekly payroll deductions. Even many of the older members seemed to grasp the fact that while retirement was right around the corner, the money in their retirement plan would be drawn down over the next 20 to 30 years. They understood that the overwhelming majority of the money would stay invested as monthly withdrawals continued. If only more do-it-yourselfers could grasp that reality.
USA Today recently wrote that there are a few events, any of which could get investors to wake up and smell the coffee.
The first was that if jobs pick up, so will consumer and investor confidence. We agree, but find that event unlikely to occur any time soon.
The second was the resurgence of a bull market that would shake investors out of their funk and impel them to start to buy equity funds again. We agree wholeheartedly.
The third is establishing clarity over government policies on business and taxation. The Congressional elections in November appear to be the best chance in that regard. The electorate will decide if they approve of current policies or not. Should a reversal of course prevail, markets will rejoice and investors will be encouraged.
The fourth is an increase in dividends on common and preferred stock. With interest rates on bank accounts and U.S Treasuries at all time lows, any meaningful increase in dividends on stock would move investors back toward owning dividend paying stocks or funds. Again, government policy must cooperate, and the current proposal to triple the tax rate on stock dividends would be quite destructive. November will tell the story on that situation too.
The last possibility is that investors couldn't resist stocks this cheap relative to earnings. Our evaluation is that this hypothesis is without merit. Do it yourself investors can ignore a lot of things they refuse to look at. Stocks are already cheap and nobody cares.
Our bottom line prediction is that stocks will trade in their current narrow range until the elections in November tell us whether the public agrees with current economic policies or not. The market's reaction will follow.
• • •
William T. Ryan is president of Ryan Financial Advisors in Andover. His column appears each week in the Sunday Eagle-Tribune. Reach him at 978-475-1500 or by e-mail at wtryan@ryanfinancial.com.
