The stock market is at a major inflection point.
On the plus side, the Dow Jones Industrial Average is challenging all-time highs and the S&P 500 is back to 2007 levels. On the downside, Europe’s economy still is crippled and D.C. remains dysfunctional — oh yeah, and a little stock called Apple (NASDAQ:AAPL) has decided to take a swan dive and ruin many a portfolio.
So which direction are we going: up or down? I don’t pretend to know the answer — but I have read a host of interesting articles and columns lately that make a good case one way or the other.
A week ago, I weighed in with 15 expert takes on the direction of the market. Now, here’s another host of links to further reading on this all-important topic:
Return of the Little Guy: Small-time investors appear to be dipping a toe back into equity markets, according to a recent New York Times article. A similar piece in USA TODAY riffs on the same idea of cautious optimism about “retail investors.” When you consider all the money that people have been sitting on out of fear and uncertainty, this could be a big catalyst for a market move higher. Because even if Joe and Jenny Sixpack don’t have a million dollars laying around, a few million similar families putting a few thousand dollars into the market could be a big boost to stocks.
“Animal Spirits” Might Be Back: As Josh Brown of The Reformed Broker puts it, we might be moving from a protect-the-nest phase to a hunting-and-killing phase. The downside risks have persisted for a long time now, and Josh cites a litany of “upside risks” that including housing, a new energy boom thanks to freckling et al, and pullbacks that have become opportunities instead of risks.
Great Q1 Momentum: Mark Cranfield over at the Wall Street Journal nicely sums up the recent run and chance for continued upside in this video. In short, strength in Japan and the U.S. coupled with the lack of a fiscal cliff crisis means there aren’t many policy speedbumps until the Italian election in March.
Earnings on a Roll: If you believe earnings matter, it’s encouraging that more than two-thirds of S&P 500 companies that have reported have managed to top expectations — some 67%, according to BTIG. Yes, the bars might not be high … but companies performing well vs. forecasts is a good sign that things at least aren’t worse than expected. Furthermore, Joe Terranova runs down revenue and EPS growth in detail (so far) to show that positive momentum is already showing up in the numbers.
Japan and Housing: As The Fly puts it, by law we cannot go any lower. That’s because central banks are fueling a recovery in Japan’s equity market as well as the U.S. housing market.
The Little Guy Is Always Too Late: Remember that first bullish point? Well, it’s also sometimes seen as contrarian once the herd starts thundering into the market. Maybe not in the immediate term, but perhaps sometime soon. Remember all those poor saps buying tech stocks in 2000 instead of 1997? Yeah, there you go. Just because capitulation of the bears is widespread, as John Hussman writes, doesn’t mean we are in a bull market.
Global Markets Ain’t So Hot: There’s a lot of talk about how investors have been made whole again thanks to a big rally in the S&P 500 to get us back to pre-Lehman levels. However, global equities tell a much different story. China’s Hang Seng is down 20% from its 2007 peak. Japan’s Nikkei is down about 40% from its 2007 peak. While the iShares MSCI Germany Index Fund ETF (NYSE:EWG) had a great 2012, it remains off almost 30% from its 2007 peak. So let’s not act like we’re back to square one yet — at least from a global perspective.
Consumers Afraid to Borrow: There’s a lot of talk about how the pain of the past few years was a necessary deleveraging, and how consumers are finally ready to spend again now that their debts are in order. However, Nomura’s Richard Koo says consumer budgets are still in need of repair. Cullen Roche of Pragmatic Capitalism is more optimistic than Koo — who warns it could take a few more years to correct this “balance sheet recession” — and points out that we are moving in the right direction in regards to household debt. However, Roche admits it might be too early to expect Americans to start taking on debts again before 2014. Obviously, bad debt and irresponsible borrowing is bad, but credit is a necessary part of economic growth and big-ticket purchases — and stagnant borrowing implies people are not spending, and don’t plan to anytime soon.
Global GDP Troubles: Yeah, yeah, yeah. You heard all about U.S. and China and Europe GDP fears. But how about Britain? Are you still so willing to shrug off slowdown fears with the specter of a triple-dip recession there?
“Risk-Off” Again: There has been much ado about the “risk-on, risk-off” nature of the markets in recent years. Plainly put, there are short windows of opportunity when correlated assets move higher, and then short windows of trouble when all investments head south. There have been hopes we are moving past this, but another Nomura note indicates that the bears are piling back into “risk-off” assets like Treasuries.
Don’t Forget Our Inability to Predict Trouble: As Tim Knight points out in a great post about “being wrong for all the right reasons,” in 2007, everyone was convinced Bear and Lehman were A-OK … and only now do we understand the massive risks they posed. And as The Reformed Broker writes, the next crisis is coming — we just haven’t noticed it sprouting yet.
What’s your view? Leave some links or chime in below.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.