Last week’s continued rally on Wall Street was welcome news for weary investors. The 10%+ rise in the stock market was not sufficient to erase year-to-date losses, but any upside is welcome. The catalysts for the rally included positive reports from the financial institutions taking government help, talk about changing trading rules for short sellers, and the possibility of an accounting change in how assets are valued on company balance sheets. Also, the markets were heavily compressed on the downside, so just like a spring, they had to give a little to the upside.
Unfortunately, the fundamentals of the economy still do not support a long term rally, so this secular bear market is not over. What we’ve seen this past week is likely not the bottom and we are therefore approaching the markets very carefully. There is more bad news to come from 1st and 2nd quarter poor earnings reports as the weak economy hits more and more companies. From exporting companies to the big international firms, the global slowdown is hitting almost everyone. Even hospitals are being challenged, and unemployment is sure to rise. We’ve seen the effects of the sub-prime mortgage mess, and I don’t think we’re nearly done as more of the next tier of (higher quality) adjustable rate mortgages adjust upward. Add to that the lagging commercial real estate markets which are no doubt feeling the effects of lower property prices and lower occupancy.
A lot of you have stayed in the market the whole time it has been falling and are wondering what to do. If you have a ten-year time horizon, you can probably buy now and not worry. But I wouldn’t make any big moves right now based on this short-term upturn. If you are making regular contributions to your IRA or 401(k), you should continue to do so to help offset some of the past losses and buy companies at ½ off (or 2 for 1 depending on your favorite shopping term). As I’ve said before, there is just no substitute for regular and big savings. We could see this real bear market rally lure investors back in, just to crush their hopes soon thereafter. As always, each person’s individual situation and goals are different, so you should talk with your own financial planner about what makes the most sense for you.
I believe that we have awhile to go in the current secular bear cycle. While we will see a “bottom” in stock prices at some point, maybe even this year, many believe that stocks are still overpriced relative to their future earnings potential. No doubt, there is another bull market in our future But I would rather be patient and rely on a cautious style of investing for now. If I see opportunities to make short-term profits with some tactical moves for my clients, I will make them while limiting our downside risk. But if I miss the first part of this run-up, so be it. I see more risk than reward in this latest run-up.
And if you thought this posting was all bad news, then I’ll remind you that (my favorite season) spring officially arrives this Friday at 7:44 AM Eastern Time. I know that most of you have had enough of the snow and cold and welcome the anticipated change in weather. Me too.
Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. All material presented herein is believed to be reliable, but we cannot attest to its accuracy. All material represents the opinions of Sam H. Fawaz. Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing may change without prior notice. You can find out more information about YDream Financial Services at http://ydfs.com.
Some comments in this article were based on author John Mauldin’s recent and fine “Thoughts from the Frontline” newsletter. You can subcribe to it by clicking on the above link.