McCall's Call: Climbing The Wall Of Worry

January 05, 2011

In a year of persistent anxiety, the S&P 500 rallied 13 percent.

 

The U. S. stock market closed out 2010 just shy of a 2 1/2-year high, but you’d have a difficult time finding anybody happy about it. Hard-core bears have gone into hibernation for the winter, after three months of the bull market giving them a beating. On the other side, the bulls continue to ride the trend higher.

The issue I have with the rally is that it’s composed of hesitant bulls, meaning they are indeed long the market and own stocks. But, crucially, they’re ready to sell at the first sign of a market downturn. They’re cautiously optimistic, to use a term favored in the media.

This is important to the market because this group of investors probably isn’t “all in” the market now. If a few days of weakness hits stocks, they may sell in a panic. The important thing is that while hesitant bulls make the rally tentative, it’s no less real. Investors need to remember that.

They need to be able to separate the economic and political headlines from their decision-making process when investing in the stock market. A growing U.S. budget deficit, political turmoil in Europe or a Congress that has historically low approval ratings might have kept your money out of the market.

But remember: Investors that based their decisions not to invest on unsettling headlines missed a 13 percent rally in the S&P 500 in 2010.

Consumer And Corporate 'Green Shoots'

Even with the negative headlines and the bulls’ cautious optimism, there are plenty of green shoots and signs of growth out there for investors to be positive about.

U.S. retailers reported a 5.5 percent increase in holiday sales last month, the best showing since 2005. The strength of the consumer is a strong signal that, even with high unemployment, people are willing to spend money.

Those depleted store shelves will result in an increased demand for goods, boosting production from manufacturing facilities. This, in turn, could lead to more companies hiring to keep up with demand, lowering the unemployment rate and eventually putting more money back into the economy. The trickle-down effect of a strong consumer can be the start of a stronger job market.

On the corporate side, U.S. companies had solid earnings in the third quarter of 2010. Profits came in at $1.66 trillion, or 11.2 percent of GDP—the highest percentage since 2006. This headline didn’t get much attention, though, since at the time nearly everyone was focused on possible tax hikes and the government’s overspending. But to me the message is clear: Higher corporate profits will lead to higher stock prices.

Growth Is Increasing

Other factors that helped push the stock market upward include increasing consumer confidence among the “wealthy.” This is key: They’re the demographic group that’s responsible for the majority of spending and hiring.

Also, the 2011 estimates for GDP growth have been increased to somewhere between 3 and 3.5 percent. That’s  not considered robust, but given that the U.S. is less than two years from the worst recession in decades, it’s impressive.

Additionally, weekly jobless claims have fallen below 400,000 and are now at their lowest level since July 2008. The fact that more people are working is a signal more money will be flowing into the economy.

The stock market hitting highs can also be a self-fulfilling prophecy that will lead to even higher prices. When investors open their year-end statements and see their retirement accounts at their highest amounts in years, it could instill confidence that will lead to more market activity.

 

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