|
|
|
|
 |
|
Worst May be Over for Stocks
Four Recent Signals That you Should Consider
 By Ernie Ankrim
Chief Investment Strategist
Global Leaders in Multi-Manager Investing
April 25, 2003
This article has been provided by our parent company, and primarily deals with the US market. All figures are in US dollars unless otherwise noted.
If you look closely, you will see signs in the economy and in the markets that better times may be ahead. Like early spring blossoms, they give hope that the worst of the winter economic blight may lie behind us.
The signs are not abundant — at least, not yet. For the most part the current climate remains wintry.
After all, consumer confidence is low. Unemployment figures remain stuck at around 6%, a relatively high level, particularly if the number of those who have stopped filing for unemployment is taken into account. Economists talk of the potential of a double-dip recession. And most hope that the war would rescue us from a bad economic environment is gone.
Yet when the second half of the year arrives we may be surprised by the gains stocks have made. Those with the bulk of their cash sitting in bonds and the money market may look back and wish they had been invested before the market rallied.
Of course, we're not suggesting that investors should rush out and put all their money into stocks. Nor are we suggesting that a rally in the stock market is a certainty. Far from it; the early blossoms may wither and die as the harshness of winter sets in once more. But, investors should be aware that an upturn is possible and should remember that, by having a diversified portfolio that includes a proportion in stocks, they will be well positioned should stocks turn upward once more.
It is useful to remember, too, that generally the market moves before changes in the economy are apparent to everyone. The reason: Investors always are looking ahead, trying to get in ahead of the action so they benefit once it happens. Their combined actions move the markets either up or down ahead of the events they are anticipating.
Investors looking ahead therefore do not put much store in unemployment figures, which reflect the economy as it was a few weeks or even months before. They are not a harbinger of what lies ahead. Consumer confidence, too, reflects recent thinking and not what may be the case in six months.
With these thoughts in mind, consider these four recent signs that could be pointing to a better economy down the road.
Lower gas prices are on the way
We can see where gas prices are headed by looking at the wholesale price of unleaded regular, which winds its way through the pipeline before eventually reaching the pump. The wholesale price went up from 75 cents a gallon to $1.15 earlier this year before falling back down again as it became clear the Iraqi oil wells would not be rendered inoperable for a long period of time by the war. At last count it was trading around 80 cents a gallon.
Those figures tell us that pump prices soon should be back more or less to where they were before war fears drove them up. When they are, consumers who had been cutting back because they had been spending, say, $100 a month more on gas than they were last year may find they now have $100 more to spend on other goods.
The fall in the price might be masked by seasonal factors as the summer driving season rolls around, but few can doubt that consumers will have more disposable income in their pockets in a couple of months.
Reduction of the "war penalty"
Any impact that the Iraqi war had on the markets is now pretty much gone. The "uncertainty of the outcome" drag on stocks has been removed, and prices have already risen accordingly. The uncertainty that might have kept investors from buying stocks should be disappearing as confidence begins to replace fear.
Gold values falling
Geopolitical shocks are good for gold. From the beginning of November 2002 to February 4, 2003 the precious metal rose from $320 to $381 in the wake of war fears. From February 4 to April 18 it fell from $381 back to $325 as the outcome of the conflict became more clear. This is just another indication that the war equation has been removed from the markets.
Build-up of cash reserves
Investors have been stashing away a large amount of cash in money-market funds. At the start of 2001 the amount invested in money market funds represented about 12% of the Wilshire 5000. It now represents 28%, the highest since at least 1984.
The rush into cash is perhaps the most encouraging indicator of all as most investors tend to invest according to their emotions and end up being in the wrong place at the wrong time.
You can follow a disciplined approach that keeps you exposed to assets before the events that will impact their prices are widely known. Or you can wait until there is great evidence and cause for optimism, by which time the returns are likely to have left you behind. This often happens to emotion-driven investors. Don't let it happen to you.
Date of first use: April 28, 2003
This is a publication of Russell Investments Canada Limited. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have.
The Wilshire 5000 Total Market Index represents the broadest index for the US equity market, measuring the performance of all US headquartered equity securities with readily available price data.
|
|
|
| |
Related ARTICLES |
|
|
|
Products and services described on these websites are intended for Canadian residents only. Information on these sites should not be considered a solicitation to buy or an offer to sell a security to any person. Persons outside Canada may find more information about products and services available within their jurisdictions by going to Russell's worldwide site, http://www.russell.com.
Legal Information Privacy Policy
Required Sales Disclosure
© Russell Investments Canada Limited 2008. All Rights Reserved.
|
