Inside Wall Street: Why Investors Need to Look Beyond Daily Headlines
"Too much is expected too soon in terms of the economy," notes George Brooks in his Brooksie's Daily Stock Market blog. Just 18 months ago, the economy and markets were on the brink of collapse. "A slow recovery is the most that could be expected," he argues. As for jobs, Brooks asks what CEO is going to hire even one person if he doesn't need any workers? Indeed, companies flush with hard cash continue to refuse to do any hiring. They prefer to stay liquid and continue posting high margins and huge profits. Self-preservation or sheer selfishness?
The view would look surprisingly brighter if investors would reset their focus. Instead of embracing what the voices of doom are proclaiming -- a double-dip recession and the demise of stocks -- check on how equity prices continue to edge higher in spite of all the seemingly bad news. Accentuate the pluses, such as the steadily rising, higher-than- expected corporate profits, without which a recovery can't materialize.
Two Sides of the Equation
Sure, the news last week was hardly comforting. July's unemployment is still unyielding at 9.5%, as corporate hiring remains anemic. The intractable high level of joblessness has been the bane of the market, with investors equating it with a blockage to any economic recovery. And some doomsayers insist that the housing slump is another albatross weighing down any chance of a turnaround.
Look at the other side of the equation, however. Despite the fearsome headlines, the Dow Jones industrial average last week advanced 1.8%, to 10,653.46, the Standard & Poor's 500-stock index also gained 1.8%, to 1,121.64, and the Nasdaq rose.1.5%, to 2,288.47. To put these numbers in perspective, note that in the past 12 months the Dow climbed 13.7%, the S&P 500 rose 11% and the Nasdaq composite gained 14.41%.
A big factor is the bright picture in Corporate America, believe it or not. Some 76% of companies that have reported second-quarter results so far showed positive earnings surprises, and 62% reported upside revenue surprises. Second-quarter profits reported by 413 companies so far advanced 28.8% year over year, and revenues rose 9.7%, better than the 8.8% that analysts expected, according to Yardeni Research. This marks the S&P's sixth straight quarter of positive earnings surprises following six negative quarters in a row through the fourth quarter of 2008, notes Yardeni.
Trading Volume Will Return
The continued upticks in the stock indexes were achieved despite what many observers described as a market where investors, particularly retail or individual investors, were "on strike," as reflected by the low daily trading volume. But the pivotal point is that the averages are up nonetheless.
Once investors get their bearings right, when the job numbers improve and housing sales and starts rise again, they'll rush for the buy button, and the volume that everybody is wishing for will come bouncing back. Individual investors are usually late for the party because they aren't equipped with the tools that the big guys -- primarily the institutional investors and high-tech, computer-driven traders -- employ.
So, is the market's trek to higher ground sustainable? Call it your usual summer rally, or the effect of the old Wall Street market dictum -- the market "climbs a wall of worry." Investors have lots of worries to surmount. But invariably, whenever market indexes appear to be plunging to their lowest depths (as they did during the financial crisis), intrepid investors come out and scoop up stocks. They are not just plain contrarians. They're the gutsy but disciplined long-term investors who look way beyond the negativity of the daily headlines.
"Intense Mood Swings"
Indeed, the market will continue to confound investors who tend to concentrate on those dreary headlines. "The stock market has been exhibiting bipolar symptoms in recent months with intense mood swings from mania to depression and back," observes Ed Yardeni, president and chief investment strategist of Yardeni Research. All the market's commotion has generated lots of swings between bullish and bearish emotions, "leaving most investors exhausted," he notes.
Unfortunately, investors as well as market analysts and the news media have been focusing on the week-to-week -- if not day-to-day -- economic reports and have yet to look further out. "If investors who have been buying, if modestly, are on the money, expect the next leg of the bull market that started in March 2009 to get under way," says George Brooks.
Nonetheless, headwinds will continue to challenge the stock market, and investors will need to stay focused on the important improvements in the economy, including a vigorous recovery of the once-moribund auto industry and the quick return to profitability of the once desperate-for-a-bailout banking industry. And even the housing sector is showing signs of an upturn, as seen in the stirrings of some housing leaders' share prices, which hit lows in July but are rise, such as Toll Brothers (TOL) and D.H. Horton (DHI).
Investors should take a stand at this point about acting on the developing improvement in various sectors of the economy and avoid being distracted by short-term problems that government policymakers are now addressing. To those still unconvinced, Warren Buffett himself has expressed optimism about the path of the economic recovery. So don't get so fixated on the headlines that you get stuck on the sidelines when the recovery regains its legs.