Can the rally continue?
Good economic news has given the bulls something to cheer about, but bears point to future challenges on the horizon.
By Sheraz Mian
This week's positive jobs and GDP reports have helped improve sentiment a bit, but stocks have overall been moving sideways lately after making new all-time highs some time back.
To market bulls, this behavior is nothing more than a brief consolidation phase -- that they view as a healthy development, given the rapid gains from the summer lows.
The other side is far less sanguine about what's happening in the market, however, and sees this as a sign of things to come, particularly given the sub-par corporate earnings picture and other macro challenges coming the market's way.
These contrasting views beg the question of where we go from here. And that's my goal in this piece -- to survey the landscape of bullish and bearish arguments, to help you make up your own mind.
Towards the end, I will share a robust investment framework that you can rely on, irrespective of whether you lean more to the bullish side or otherwise.
Let's talk about the bull case first:
1) The negatives are already priced in: This means the sum total of all bad or negative news about the U.S. and global economy is already well known and reflected in current prices. It seems quite plausible since questions about the Fed, the U.S. economic outlook, China and the eurozone's future have been around for a while now and are no longer "news" to any market participant.
2) Healthy economic & earnings pictures: The GDP growth rate in Q2 may not be that much, but the better-than-expected reading still shows the economy's resilience. Importantly, the outlook remains constructive, with growth expected to steadily improve from the third quarter onwards. The July ADP provides further evidence that the labor market is healing, which should help offset some of the negative impact from higher interest rates on the housing recovery. The corporate sector is in excellent shape, with total earnings in Q2 on track to reach a new quarterly record and the earnings growth rate expected to ramp up materially in the second half of the year.
3) Central bank 'put': Some questions about the future of the Fed's QE program notwithstanding, the overall monetary policy stance across all the major economies, including the U.S., remains favorable and supportive of the market. What this means is even after the Fed starts 'tapering' the QE program later this year, it will continue to keep short-term interest rates at the current near-zero level for a very long time.
Now let's see what the bears have to say in response:
1) Market is pricing a best-case scenario: Market prices reflect consensus expectations, and current consensus expectations for GDP and earnings growth are clearly on the optimistic side. Europe's situation has stabilized a bit, but the region remains in a recession and will likely be a headwind for the global economy for a long time. The situation isn't that much better in China either, where the best-case scenario is a stable economic growth at rates significantly lower than what we saw in the past decade. The rest of the so-called BRICs appear to have hit a wall as well, which is having knock-on effects all over the world. It is way too optimistic to assume that the U.S. economy and corporate sector will remain immune from the negative forces swirling all around.
2) Economic & earnings pictures far from healthy: The U.S. economy is no doubt doing better relative to the rest of the world, but that's nothing more than what the 'cleanest-dirty-shirt' analogy tries to convey. Housing and the labor market are doing better, but GDP growth is unlikely to materially improve from what we have experienced lately. On the earnings front, don't let the optimistic consensus estimates for the second half of the year and beyond distract you from the fact that the overall picture is hardly in good shape. Estimates have started coming down already, but have plenty more room to go. Popular stock market valuation multiples that the bulls never tire of citing as reflective of under- or fair valuation start showing otherwise when more reasonable earnings estimates are used.
3) The Fed Is in a bind: The Fed didn't provide a fresh guidance on the 'taper' question Thursday, but the debate itself is reflective of the realization that the program can't continue forever. Investors have become so accustomed to the Fed pumping liquidity in the market that they see no difference between 'tapering' and 'tightening'. Bernanke's clarifications and assurances have helped stall the uptrend in long-term interest rates, but they remain elevated relative to where interest rates stood through May. The Fed's recent inability to effectively communicate its intentions about the QE program is likely a sign of things to come, as they move towards unwinding the extraordinary policy of the last few years.
Where do I stand?
As regular readers know, the bearish case makes more sense to me than the alternative. Simply put, I find it hard to envision stocks holding their ground in the current sub-par corporate earnings backdrop. The market hasn't paid much attention to the persistent negative earnings estimate revisions over the past year or so, likely on the assurance of continued Fed support. But with the Fed on track to get out of the QE business in the not-too-distant future, they have to start paying attention to corporate fundamentals.
Keep in mind, however, that being bearish doesn't mean that you have to exit the market. I remain fully invested and caution against the risks of market timing. That said, it makes perfect sense to position your portfolio for a period of above-average downside risk. I advocate greater exposure to defensive and non-cyclical industries, and look for attributes that many consider boring like dividend payers with solid earnings growth profiles.
To pick such stocks I rely primarily on the Zacks Rank, which helps me capture the essence of earnings momentum in any industry. Whether you are bullish or bearish in your near-term outlook, you move the odds in your favor by relying on the disciplined stock selection framework of the Zacks Rank.
Sheraz Mian is the Director of Research for Zacks and manages the award-winning Focus List portfolio. He is among the experts whose recommendations appear in Zacks Confidential.
MSN Money on Twitter and Facebook
The rally will continue based upon the 85B a month pouring in. The disturbing item is that unit sales across most industries are soft. Management has done a really good job slashing costs and improving balance sheets.
There is a true disconnect between the market and the economy. Can a 1.7 GDP number bode well, when we are creating 11% more money per year?
Main street sees none of this recovery. That's OK for the upper strata, but it is crushing the lower middle class and the poor.
hey but you can look at the phony numbers like a shiny new toy!
in REALITY LAND it's a different story! truth hurts you liberal vermin sleaze, I know, I know....get used to it 3more years of this nonsense and then, finally it'll be over...you vermin will be gotten rid of en masse whether the nation will survive in the meantime....don't want to even speculate!
Food Stamps are one of the most abused and wasteful social program this country has ever developed. A family of four receives more money monthly then my family of five spends a month on food. The amount paid out each month should be cut by at least one third. Purchases by food stamps should be (if not already) restricted to the following: Fresh/frozen non prepared meats & fish, fresh/frozen non prepared vegetables, deli meats/cheeses, canned goods, breads, non sweetened dairy, and non sweetened juices. The following should always be banned, and processes need to be in place where not already, to restrict: Soda, bottled water, power and energy drinks, sweetened juices, coffee, tea, ice cream, candy, energy bars, any pre-prepared meals or sandwiches, snacks/junk food, or any food that is mail ordered or shipped anywhere. If these rules would be followed, and recipients would learn how to shop and properly eat, no one would be hungry and we the taxpayers would save billions.
Keep pulling the rubber band. The longer it gets pulled, the harder it is going to snap back. Its fun being a bull now.
Not going to be very fun when it snaps back. I bet the smart money dumps before the big price drop. History keeps repeating over and over again.
The stock market isn't stable when the mere mention of easing up on the quantitative easing sends it into a tailspin.
Before Bernanke sneezes, surely his cronies know ahead of time, and then sell before everybody else can, pocketing a great amount of change. When Bernanke says "just kiddin' folks" the cronies buy up the short sales and pocket the short-term profits. I am not naive to believe this is not happening. This is why I think the market is rigged. It would appear the only safe haven left is the index fund, not a managed fund, if you want to solely rely on the market average, which seems impossible for the layman to beat.
>>> What this means is even after the Fed starts 'tapering' the QE program later this year, it will continue to keep short-term interest rates at the current near-zero level for a very long time.
The reason the US can get away with that is because the rest of the world is in a tailspin and no better off. Europe, Asia, are they really a safer place to park your money. It's still fiat currency. It's so nice to be able to buy time like that.
WHAT'S THIS!! WHAT'S THIS!! WHAT'S THIS!! WHAT'S THIS! WHAT'S THIS! WHAT'S THIS!!
how so?, iF everything is so fantastic, and great?? far below the 2005 peak???', ah the communistic approach to free market democracy! oh don't you just love that liberal 'I hate land owners' mantra, since that's what liberals are known for, they hate the 'property owners' much like their communist brethren in ANY communist suppressive regime, sure!!! where are all the people benefiting from this rising phony market, oops! just answered my own question didn't I.
that lazy-azzed dirtbag sleaze would own land to if it wasn't so hopped up on bad pot and eXstasy, and actually GO TO WORK! instead of bitch and moan in mommy's basement, pretending to be 'web designer' right!!! still blamin' Bush are we that your azz isn't employed?? still goin' there you vermin 5yrs down the pike, you sounded riDICulous back then now you azzwipes sound soooooo insane with that tired old mantra of 'blame game' rhetoric NOW...it's over libs, sooooo over for you it's not even funny.... and where's all the complaining about your messiah's listening in on ALL conversations, phone, txt and what not?? where's all that hate for him?? you libs are something else, you whine BUsh this and Bush that meanwhile he wasn't listening to AMERICAN's business, just that muslim filth, AS IT SHOULD BE DONE! or using the IRS and NSA as weapons against AMERICANS? hmmmm. selective hypocritical vermin aren't we! well you azzholes are in the same boat as centerists, conservatives and low life sleaze libs, enjoy!
MR. FAT CAT...
What gives buddy? You've always tweaked these negative ninnys with insightful commentary, and intelligent responses. Now it seems like your keyboard has been hijacked by some Junior High twit. By the way, (as you well know), Market Bulls NEED the Anthony M.'s and the Bill Fleckensteins of the world, encouraging people to stay out of the market. The fact that a lot of people have been reluctant to re-enter the market has made things just that much sweeter for real investors. We don't need nor do we want weak kneed buyers of stocks. All of these guys who have been so terribly wrong for the last 4 years are a good reason why things have gone so well for the others. I WANT THE OLD CAT BACK! YARRRRRRR!
MORE ON MSN MONEY
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The photo-sharing site only has 10 employees, and it may be up for grabs.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.