As the markets fumble and
roil, bounce intraday from Fed pronouncements and geopolitical unrest, should
we be cautious or aggressive at these levels?
Although the averages defy
gravity by maintaining lofty valuations, I would think twice before betting the
farm on its continuation. Although most
data indicate that we are “turning the corner” from recession, the same risks
that got us in trouble originally still exist for the most part. In addition, as if climbing a “wall of
worry,” the more robust the numbers get, the more frightened some become.
That, in itself, could be the
catalyst for a runaway panic, besides the data itself if one bothers to look.
Even as we add jobs, build earnings momentum, and
increase valuations, rising inflation might quell the backbone of the recovery
and spending.
Priceless.
The markets have resiliently
recovered most of the losses incurred from 2008, but exogenous and fundamental
factors have reversed during the process.
Who doubts that conflict in the Middle East
creates reverberations in price, stability, and confidence for sustainable
recovery. The only thing rising more
rapidly than mergers and acquisition activity is the blood pressure of the
average investor. For the time being,
the markets seem content to ride out this wave of semi-optimism until, or
unless, something bad happens.
Bear in mind, though, that two
months of capital gains does not erase the bear trend, nor does it define any
satisfactory expectations. Indeed the
recovery should add jobs and renew
capital spending, but I see no reason to declare “Mission
I am taking an optimistic but cautious view of equity
market prospects, paring down losers and focusing upon long-term demographics
in Energy, Utilities, Basic Materials and Technology.
Tinier portions, bigger boxes.
Some of these fundamentals are
underpinned by pricing power.
Anecdotally, we are seeing price increases in oil, food, and
clothing. This year alone consumer
prices are averaging 3 percent inflation…not annualized, year to date!!
Creeping pricing pressure can
be a boon or hindrance to economic growth and equity valuations. Thus far, it has only proven to be positive,
reflected in earnings increases. But many are starting to worry about when these prices might become
impediments to consumer spending. If
wages don’t keep pace with jobs expansion, that might be a good time to ponder
the situation more deeply.
Even modest price-creep can
derail confidence if one is in a tenuous situation already. There is no doubt that an earnings gap and a
confidence gap is widening, to the disfavor of the wage-earner.
Think about it. You wake, use the bathroom (toilet paper),
have a bowl of cereal (wheat), get dressed (cotton), take the train or car to
work (energy) have a cup of coffee (beans) at the office, have lunch (meat /grains),
followed by a fruit snack (fruit/vegetables).
You get home, pay some bills (insurance, mortgage, auto). Before bed you have a soft drink (beverages).
Which of those items costs less
than one year ago?
I didn’t think so.
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