Jul
8
Pieces are in Place for a Big Second Half
The stock market got off to one of its strongest starts ever in 2011, picking up right were it left off after a stirring fall rally offset eight months of lethargy in 2010. But after shaking off one depressive force after another, things began to unravel in June and soon all year to date gains were lost. We are a week into the third quarter, and it is easy to get excited over the buying frenzy that has occurred over the last eight trading sessions since June 27th. But is this just one of those typical short-term manic episodes based on some decent headlines, or could this be the start of another strong rally, much like last year, but beginning a bit sooner? Of course no one knows; one default, natural disaster, or international incident can quickly eliminate bullish momentum, but here is why, barring any black swans, Mr. Market might remain in a swell mood through December’s holiday season.
1. Don’t underestimate Japan
And I mean this two ways. First, don’t underestimate the impact the Japan tragedy had on the global system. Japan supplies so many corporations worldwide with products big and small that no ever even things of. They have the world’s third largest economy. The US is extremely dependent on Japan and a definitive slowdown in production took place as Japan coped with its wreckage. But…the Japanese have been making amazing strides towards recovery, and the planet has really come in to help. The Japan tragedy will have only a fraction of the negative impact market wise that it did in the second quarter.
2. Gas and Food
Americans just didn’t have the same amount of discretionary income to pool back into the economy because they were getting beaten down at the supermarket and the pump. Give Bernanke credit on this one; he said the $4.25 gallon of gas and sky high commodity prices were a passing shower, and he looks to be correct. Evidence of a rebound in this area came in today as major retailers reported strong June sales.
3. Europe
No, Europe is not in good shape financially, but it is not going to collapse and its most ailing countries, such as Greece, have plans in place for recovery. Whenever the EU is in the news for negative fiscal reasons investors flee; this was a depressive force during the first half of last year and this year. But Greece passed its austerity plan and things should quiet down for awhile anyway. That’s all the market cares about.
4. Corporate Earnings
Corporations traded in the US are by and large in good financial health and are reporting strong earnings. Rule #1 companies are by and large in tremendous financial health. Many Rule #1′s are poised for a breakout.
5. An unusual amount of international unrest
Although originally shaken off by the market, the amount of international unrest got just too heavy. Egypt resolved rather quickly, some potentially market shaking civil revolts in oil producing nations were thwarted off, but Libya was just one problem too many. But as news from Libya retreats off the front page everyday, investors weigh it depressively less and less. No one knows what the next international incident will be, but chances are, the majority of these headlines were made in the first half.
6. Unemployment and Housing
Their numbers are not good. But investors don’t care about good vs. not good, they care about improvement vs. regression. Housing numbers are better over the last two months. Today’s ADP report on private sector growth came in twice as strong as analysts had forecast. Weekly initial jobless claims were at their lowest in seven weeks. If data in these two sectors can gain momentum, the market will react in kind.
7. The US budget
Washington worked over the 4th of July holiday in an attempt to hammer out a new budgetary plan. President Obama called today’s talks “constructive.” Reigning in of government spending will happen, making investors less nervous about the exploding federal deficit.
8. Overreaction
Americans were bombarded with “the sky is falling” propaganda during the second quarter. Housing and employment were in the pits, manufacturing dipped, GDP was under 2%, and institutional money drank the Kool-Aid that a double dip recession was in the cards. That will not happen. Yes, things are not where we want them to be and countless people are struggling right now. However, in the overall picture, unusually poor weather, speculative commodity plays, the above mentioned international factors, and other transitory factors were at work too, and things were never as bad as they were painted to be. Don’t agree? Watch as third quarter GDP will be better than the second quarter, and the fourth will be better than the third.
Time will tell if things come together and the market has a big second half. I think it will, and the wonderful businesses that comprise the best of Rule #1 investing are going to help head the charge. Look for big second half from wonderful tech and education businesses in particular.