There has been much talk about the “recent” rally in the stock market. I say “recent” for a reason - even though there have been some bumps along the way in the last several months, the stock market has made a substantial move over the last year, as evidenced by the performance of the three major indices.
Those indices - the Dow Jones Industrial Average, S&P 500 and the NASDAQ Composite Index are up more than 40 percent, 55 percent and 45 percent, respectively, over the last 12 months. Pretty impressive at first blush, but we do have to remember how dire the outlook was last year at this time, when the S&P 500 had just finishing falling 52 percent from mid-May 2008 to early March 2009. The unfortunate but true perspective is while the stock market has rallied considerably, it remains below levels reached in late 2004-early 2005.
That bumpy ride I mentioned before is rather evident in the year-to-date performance. On a net basis, the S&P 500 is up 5.8 percent as I write this, but that includes the 5.2 percent drop from the end of last year to early February, which was followed by a nearly 12 percent move from Feb. 8 to date. That upward move has been fueled by positive earnings announcements and preannouncements from a number of companies, including Best Buy, Qualcomm, Honeywell International, Ryanair Holdings, and others, as well as an improving global economic outlook.
On a global basis, we are getting improving results in some geographies and reduced expectations in others. Earlier this week, the International Monetary Fund forecast German GDP growth of 1.2 percent in 2010 and 1.7 percent in 2011. The IMFs forecast reflects muted Eurozone economic growth and restrained German export growth, given the cautious nature of U.S. consumers. Canada’s gross domestic product increased 0.6 percent in January, while the market had expected growth to hold steady at December’s rate of 0.5 percent. On Tuesday of this week, the Finance Minister of Finland revised its growth expectations and now sees Finland’s economy growing 1.1 percent this year as it exits the worst recession in more than 90 years. In December, the Finance Ministry said it expected 0.7 percent growth for 2010.
The United Kingdom’s Manufacturing Purchasing Managers Index (PMI) rose to 57.2 in March, which beat expectations of 56.8 and followed improved PMI readings for both the Eurozone and Germany. Chinas manufacturing sector continued to improve in March as orders continued to improve. HSBC’s China (PMI) showed first-quarter manufacturing output expanded at the briskest clip in the survey’s six-year history as the index rose to 55.1 in March from 52.0 in February. As background, a PMI reading above 50 signals expansion, while one below 50 signals weakness.
Offsetting those upbeat signals, Sweden’s leading economic think tank, NIER, lowered its outlook for the Nordic economy and now forecasts growth of 2.4 percent in 2010, down from 2.7 percent it forecast in December. While down modestly, the overall direction remains positive, and NIER also raised its growth outlook to 3.8 percent in 2011 from the prior 3.3 percent. The Bank of Spain expects Spains economy to grow more slowly in 2010 than the official government forecast of 1.8 percent. The lower growth forecasts of 0.8 percent offered by the Bank of Spain reflects ongoing struggles in Spain, which has the highest unemployment rate in the euro region and the third-largest budget gap.
All in all, it appears the global economy is improving, and that is a welcome sign, for it means better prospects ahead and more likely than not upward revisions in company earnings and economic forecasts. Already, earnings expectations for the S&P 500 have started to creep higher, and that bodes well for further gains in the stock market.
Current consensus expectations for the S&P 500 in 2010 stand at $78.16, which is a nice move up from the $74.24 on record in late December. Another aspect that would add fuel to the stock market fire is the amount of cash sitting on the sidelines should those investors opt to get back in the market. In a recent interview, Charles Schwab Corp. CEO Walt Bettinger talked about the companys investors and shared that “28 percent of their money with us is in cash, which is double what it might be in a more bullish environment.” Should those and others investors either become more confident in the economy or simply decide to get back into the market for fear of being left behind, the incremental cash would likely spur the market higher in the short term.
Of course, we have to consider the risks as well as the opportunities, and there are several risks ahead. One that could result if the global economy grows more quickly than expected would be a spike in the prices of oil and other raw materials. Already, oil prices have risen from $69 per barrel in early February to just below $85 per barrel “as a pickup in overseas manufacturing activity painted a picture of rising demand for energy amid global economic recovery.” As I mentioned in previous columns, rising oil prices ripple across a number of industries, and as such, rising oil prices could crimp profits.
Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at firstname.lastname@example.org. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.
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