By Ted Olshansky
Publish Date: February 29, 2008
This month My Automated Advisor is going to attempt to provide an objective look at what we can expect from the overall market in the coming months. Being out of the country, but not out of touch with the market, I have attempted to gather my thoughts for my readers. What we are going to do is help you keep your head on while others are losing theirs.
The stock market is most often a reflection of the mood of the people. Coupled with this are earnings and interest rates. Of course there are other ancillary issues but the afore mentioned are key. Every day data come out which have temporary effects on stocks. During the last month an example of some of these statistics and headlines are as follows:
If an investor is going to buy and sell on each piece of economic news or be psychologically affected by such information, he/she is going to be a loser. The market is where it is today primarily due to the sub prime mess. This became known more or less eight to ten months ago (Dow Jones 14,100) when most of the economic news was good and we had no idea of the extent of the sub prime fallout. Now many stocks are cheap, and investors are afraid to commit funds to the market.
Always invest some of your funds in companies with good earnings during a correction. They are on sale.
If we know why the market has fallen about 15%, can we use this information to gauge where the market may be in six months to a year? Possibly!
We have had periods of uncertainty and problems during this writer’s forty years experience.
Anyone who sells short the U.S. economy is going to be a loser. – J.P. Morgan
The U.S. economy, resilient and innovative will get through the current mess as we have done in the past.
With this problem corrected, I believe interest rates will remain at or near current levels to keep liquidity available. The Fed surely understands the current problem. It has to keep an eye on the steep rise in commodity prices, but this month it reduced its economic growth outlook showing their concern and relief that inflation will moderate in the coming months.
As for earnings, let’s remember that historically (the last 40 years) price to earnings multiples have ranged from about 15 to 22. The only time PE multiples went to very low levels (7-10) was during the very high inflation period of 1970-1974. For the record, periods of very high inflation will send PE ratios downward and conversely, very low inflation will send them upward.
Now stocks are selling at about 16-17 times estimated earnings. This is actually near the lower end of the range. Generally, bear markets begin with PE ratios at much higher levels, i.e. 21-23.
Therefore, with a moderation of the sub prime issue likely in the next year, inflation not a primary concern, and interest rates relatively low it is likely that the mood of the country will improve. And with this set of circumstances in place, the market seems to often move more upside than downside.
In conclusion, the market should be trending higher over the next several months. When you see all the good news coming out and the market roaring ahead, remember, if we are buying today when all the bad news is seen in the papers everyday, we should be lightening up when all the good news is appearing.
Market Sentiment Number: 70% (For our new readers, this is the percent of available funds to be currently invested in the market.)