REASONS FOR OPTIMISM
When was the last time the Dow took a six-week tumble?On June 10, the Dow dipped below 12,000 and posted its sixth straight weekly decline. You have to go back to October 2002 to find a Dow losing streak that long. If you’re hearing bearish groans in the distance, you’re not alone: the bears are making their voices heard as the Dow is down almost 7% from where it was at the end of April. Despite the recent stock market volatility, the long term outlook is positive. Here are some reasons to be optimistic:
Q2 earnings projections are quite good.Investment research firm FactSetfinds that despite the losing streak, aggregate Q2 S&P 500 earnings estimates are basically unchanged from late May. The collective forecast projects a 14.6% growth in earnings for the quarter and a 10.4% jump in revenues. (That double-digit revenue growth would be the best since Q1 2010.) As earnings are truly the mother’s milk of stocks, the market could heat up this summer if these collective predictions come true.
Stocks are still cheap.On June 3, the S&P 500’s P/E ratio was 16.4 compared to 18.3 a year earlier. Most stocks look like a fair value right now.
The economy is still growing.The Federal Reserve’s latest Beige Book and the twin PMI indices from the Institute for Supply Management both signal this. In fact, the ISM service sector index showed the growth of that sector accelerating in May.
Homebuying could be poised to pick up.Sustained high unemployment isn’t going away this year, but some silver linings are emerging that bode well for the housing market. Moody’s Analytics says that the ratio of home prices to income is now 20.9% below the average ratio from 1985-2010. Mortgage interest rates are at levels unseen since the early 1960s. There are also indications that prices may be approaching a bottom in metro areas not rampant with short sales and foreclosures. Real estate analytics company CoreLogic found that home prices were down 7.5% year-over-year in April, but only down 0.5% when distressed sales were factored out.
We Were Born with Rose Colored Glasses. The belief that the future will be much better than the past and present is known as the optimism bias. Our optimism bias motivates us to pursue our goals. According to Tali Sharot in his book The Optimism Bias, optimists, in general, work longer hours, tend to work harder and save more. Optimism alters our expectations and shapes outcomes in a positive way.
Hang in there.The bull market is maturing; QE2 is ending. We haven’t yet seen a correction, just a pullback. Informed investors stay the course.
Stay Optimistic and Stay the Course,
PS. And have a great weekend. I am looking forward to spending time with my children and grandchildren who are visiting from the midwest. And going to a sneak film preview with friends.