IS NOW THE TIME FOR GROWTH TRADE?
I know that being an optimist is not nearly as popular as being a pessimist when it comes to stock market prognosticating. After all, it is more exciting to read about the coming economic catastrophe that will send the global economy into an inescapable black hole than read about continued stock market gains. Pundits spewing negativity become famous for predicting a 20% market pullback correctly and whether accurate or not, their future predictions are taken as gospel. Analysts who call for continued market gains are dismissed as stock pumpers with some kind of hidden agenda. The ‘sky is falling’ crowd of course has no hidden agenda; they are making these predictions out of a duty to save society. Not! Well sorry to bore some of you, but here come a few reasons to be optimistic for 2011 and it’s important for your investment portfolios to be positioned to take advantage of potential continued market appreciation.
Fear mongers are pointing to surging bond rates as indicative that continued governmental printing of money and eventual inflation will lead to higher interest rates. Over the last month, rates on long-term U.S. government bonds have risen about 100 basis points to more than 3.5%. But maybe there is something else at play here that the pessimists are conveniently omitting from their economic analysis? While slower than many would like, the U.S. and global economies are actually improving. We have recently received a slew of encouraging economic data. Strong improvement in the retail sector was reported in November with retail sales up for a fifth straight month. This is in addition to the fact that all indications are that the recent Christmas shopping season was strong. Manufacturing from the industrial-production report is up five consecutive months and the production of business equipment (capex) rose 12.5% over the past year. To top it all off, economists are predicting 4% growth for the 4th quarter.
Continued Tax Cuts
While there are some who criticize the recent tax deal, low personal income tax rates were extended for another 2 years and new incentives to encourage business investment could set the stage for a surge in economic activity and new hiring. With an economic policy that has basically been a non-stop 2 year assault on business with all kinds of added regulation and a general anti-business attitude coming from the Obama administration, businesses were waiting for a positive signal before embarking on new hiring and new investment. The recent Republican landside win in the congressional elections was the green light businesses needed. Corporations have succeeded in significantly cutting expenses and are now very lean. This means that not only are they more agile and able to quickly adapt to changes in the marketplace, but when the overall economy starts improving, they are poised to post very strong profit growth. That should be good for their potential stock appreciation.
3rd Year of Presidency
There has been some really interesting analysis of both economic and stock market performance during the various years of a presidential term. According to the New York Times, “The American economy and the American stock market tend to do much better when a president’s term is nearing an end than they do when the term is beginning. If that pattern continues, the news from both Wall Street and Main Street may get better over the next two years. For the stock market, the sweet spot is usually the third year of a presidential term, which is 2011 for the Obama administration. The stock market often leads the economy, and that seems to be the case in presidential cycles. The fourth year, on average, has seen the most economic growth.” Since the end of WW2, 62% of U.S. economic growth came in the final half of a presidential term. The article continues, “The stock market pattern was even more marked. An investor who owned stocks during the third years of terms, and stayed out of the market during the other years, would have earned profits more than twice as great as those that went to an investor following the opposite strategy, owning stocks in all but the third years.”
Sure there are still some serious economic issues to deal with, but it seems like the economy has turned the corner, and it may mean that you should take another look at your portfolio to potentially profit from the improving outlook.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il
