Time to buy stocks?
Global markets have weakened as the European debt crisis worsens, but US investors can take comfort in several positives.
It is said that opportunities are never lost -- someone else will catch the one you miss. And the saying remains true in the equity market. No one wants to miss a good opportunity to make exceptional profits.
So, is this the time to take the plunge? Or should we wait for the markets to fall further?
Well, considering the increasing concerns related to the European economy, it's hard to predict the direction of market movement. However, given the significant exposure of U.S. banks to weak European countries, it would be difficult for the country to escape unscathed.
So with the debt crisis picture in the eurozone getting dirtier, the risk of another major worldwide stock market slump is sky high. Coupled with our own unrelenting problems -- high unemployment, sluggish economic growth and sharply sliding consumer confidence -- the European crisis is already reflecting in U.S. stock market, making the valuation of many U.S. blue-chip stocks look attractive. But a question continues to nag: Are we closer to the beginning of a new slump than the end?
Many analysts are saying that the European crisis could even shape into a bigger slump than the latest U.S. recession. But a bigger recession in Europe does not necessarily mean a similar slump in the U.S. In fact, in the U.S., things are more concrete and transparent now with proactive government and regulatory measures. Like before, the chance of a sudden breakdown is quite unlikely as all eyes are on pre-problem situations.
Not much cause for concern
Currently, the global stock market has come crashing down close on the heels of the deepening European sovereign debt crisis. But even if the crisis in Europe deepens further, the aftershock will probably not be able to shatter the U.S. economy to a great extent. As part of its preparation, U.S. has already started taking precautionary measures.
According to data provided by Fitch Ratings, the 10 major U.S. money market funds have already reduced their exposure to European banks by about 9% in October. Also, the Federal Deposit Insurance Corp. chairman, Martin Gruenberg said last week that direct exposure of U.S. banks to the European debt crisis is limited.
So, the chance of the economy slipping back into recession is not as much as in Europe. We are not saying that the recent weak economic reports should be thrown in the trash, but there are several positives that will keep the economy afloat and your money safe.
There is a palpable weakness in several data, from manufacturing to consumer spending. In October, U.S. consumer spending growth dropped and manufacturers received lower orders, indicating a lower-than-expected fourth quarter GDP growth. Unemployment rate, which stood at 9%, was the primary reason for the lower consumer spending.
However, a quick recap of the recent years shows that corporate earnings have been at their strongest levels. Also, in the third quarter, FDIC insured banks earned the highest level of overall profit in more than four years. Plus, the October employment report showed improvement.
According to the Bureau of Labor Statistics, non-farm payroll employment witnessed 80,000 job additions in October. Moreover, the total number of jobless Americans declined to 13.9 million from 14.0 million in September.
To sum up, though we keep hearing heated talks on the possibility of a double-dip recession, there are no major issues (like the well-known housing or credit crunch) to be scared of, or no reason to stay away from the market.
Has the market tanked?
It’s hard to gauge whether the market has bottomed out or whether a further downside is lurking around the corner. There’s seemingly no end to bad news, though one keeps guessing if the major damage is finally done.
We don’t expect any explosive news to uncover over the next few years. Actually, the major class action lawsuits and stricter regulations against risky U.S. companies have reduced the chance of their collapse to a great extent.
However, opportunities to buy good stocks at attractive price won't appear at once. There could be further downside corrections. But if you don’t start investing now, you may miss the boat.
Recall missed opportunity
The latest recession that started as a subprime credit issue in the U.S. mortgage market in 2007 gave investors good opportunities to make huge profits from stock markets. Many of the blue-chip stocks significantly lost their values. But the flow of negative news did not stop and investors were scared to enter the market.
When recovery showed, investors took it as a passing phase and waited for the stocks to touch their previous lows. That’s the common investor psychology that prevents entry into the market at the right time.
With time, the scenario changed, the economy recovered and the stocks bounced back. Investors started regaining their confidence on many of the popular U.S. stocks. IBM (IBM), Caterpillar (CAT), E. I. du Pont de Nemours (DD), Walt Disney (DIS), American Express (AXP), Intel (INTC), Apple (AAPL), Amazon(AMZN) and Wells Fargo (WFC) recovered at least 100% from their 2008-2009 price levels.
You may have missed your chance to enter the stock market in 2008-2009. And if that makes you a grief-stricken investor, opportunity is just about to knock at your door again.
Your winning strategy
The market has been falling almost non-stop for the last several trading sessions. Moreover, almost all the technical indicators show that it is still way ahead of its oversold state. Also, sentiment readings are weak primarily due to concerns related to Europe.
However, we do not see this as the time to panic and hold back investments. On the contrary, with declining unemployment claims, stabilizing home prices, stronger auto sales, increasing consumer borrowing and continued low interest rates, confidence in U.S. recovery stays strong, even as the domestic dome as well as global negative cues pull the market down.
As a matter of fact, we think this fall in the stock market allows more buying opportunities once again after 2008-2009. This is actually the right time to enter the market by investing in blue-chip stocks with every fall.
But when the direction of the market movement is uncertain to some extent and the price range has chances of falling further, cost averaging with small investments would be the best strategy. So, don’t hurry to empty your pocket.
We would suggest adding large-cap stocks with a Zacks No. 1 Rank (Strong Buy) to your portfolio at this point. Since inception in 1988, Zacks No. 1 Rank stocks have generated an average annual return of 28%. During the 2000–2002 bear market, Zacks No. 1 Rank stocks gained 43.8%, while the S&P 500 tumbled 37.6%.
If you see the history, many blue-chip stocks significantly lost their value, some were even about to fail. But those who bet on them were highly rewarded.
To make this long story short, here’s a thought from Warren Buffett: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
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As geopolitical tensions threaten to spin out of control, investors are wondering how best to position their portfolios for the global turmoil.
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