What's Driving the Markets Lately?

July 9, 2012 8:39:00 AM


First, let me begin by saying that I believe today there are great companies on sale for long-term investors!

Now, what has driven the markets lately besides fear, uncertainty and doubt? The same things that have driven the markets for the last three years-Europe, China and the United States.

Obviously, as we continue to grow as a global economy, when three of the largest economies are struggling, investors must be prudent and patient with investment decisions.

As Europe continues to deal with the ongoing financial crisis, most eyes have turned from Greece to Spain. Uncertainty over the political and financial debate on how to handle the crisis has clearly had impact on investors around the world. Many believe Europe has not been as aggressive as the United States in providing financial solutions to the fiscal crisis in many of the Euro countries like we experienced a few short years ago.

Along with Europe's financial woes, China-after many years of tremendous economic growth-has now been battling a continued slowdown in their own economy. Many hope the recent move to lower interest rates will help stimulate growth. However, European problems will not make it easy any time soon for China to regain the growth rates of just a couple of years ago.

Lastly, we move to the United States. Besides the uncertainty over the Presidential election later this year, the U.S. economy continues to move along with anemic economic and jobs growth thanks to various factors including the continued de-leveraging of debt and uncertainty over direction of future Government policies.

Of course, the media continues to provide investors with plenty of rhetoric to continue to drive investors away from investing in companies and the stock market. With the recent continued out-flow of capital from equities and equity mutual funds into fixed income, investors continue to show their lack of confidence in investing in equities. Personally, I believe that is a sign that there are great sales in the markets today.

Ironically, many investors remember the go-go days of the stock market in the 1990's and the huge appetite investors had for equities right before it topped in March of 2000. Of course, at that time, investors were eagerly investing all they could into the U.S. stock market as it continued towards its climatic top in March of 2000. Of course, we all know what happened after that....

So, where do we go from here?

Short-term (next 6 months or so), expect lots of volatility and the ews of the day to drive the equities markets. Longer term? It's anyone's guess. However, a couple of key points investors must think about.

First, as compared to market valuations in 1999, the S&P 500 trades at over a 50% discount from where it was at the top of the market in 1999. Second, I do not hear too many experts in the investment business saying bonds are a great investment. With historically low interest rates, investors continue to hunt for yield in their portfolio. Of course, select dividend stocks may be a good fit for providing yield.

Lastly, I believe it's only a matter of time before the global economy begins to stabilize and look for more robust economic expansion. When that will happen? No one knows. However, with investor sentiment at extremely low levels (as indicated by out-flows in equities and in-flows to fixed income), do not be surprised if one day you wake up and realize that the S&P 500 is hitting all time highs and the two years of extremely poor performance in the International and Emerging Markets has reversed, providing investors with pleasing returns.

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Mark Pearson

Mark Pearson

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