The following commentary is from the May issue of the Forbes Growth Investor.
The S&P 500 is up almost 30% from its March 9 low. This has some investors wondering if we are now in a new bull market. Whatever you choose to call it, we remain skeptical and warn you not to become complacent. After all, it is not as if all the problems in the economy have suddenly gone away. On the contrary, they are growing worse. The only difference is they are now getting worse at a slower rate.
Take the latest S&P/Case-Shiller report on housing prices. The 20-city index documented an 18.63% decline in housing prices from February 2008 to February 2009. However, that was a little better than the 19.03% decline from January to January. In other words, things are getting worse, but at a slower rate.
The GDP report for the first quarter of 2009 also was interesting. The 2.2% rise in personal consumption expenditures was certainly welcome news, but it was not enough to offset big declines in inventories and fixed investment. Furthermore, international trade is falling off a cliff. Exports fell 30%, which came on top of a 24% decline in the fourth quarter of 2008. Imports plunged 34%. They were down 17.5% in the fourth quarter. Overall, the economy contracted 6.1%, but that was somewhat better than the 6.3% contraction in the fourth quarter of 2008. In other words, things are getting worse, but at a slower rate.
The Federal Reserve added fuel to the stock market’s rally when its Open Market Committee released a statement saying,“… the economy has continued to contract, though the pace of contraction appears to be somewhat slower.” You guessed right:Things are getting worse, but at a slower rate.
Of course, things cannot get better until they first start getting worse at a slower rate. Therefore, investors are not wrong to cheer. A bit of a rally in stocks is fully justified. However, a 30% rally in just a month-and-a-half seems extreme. We continue to believe long-term investors should think more about buying than selling. Anyone with an investment horizon of five years or longer is not likely to regret buying stocks today. Nonetheless, we also expect a meaningful sell-off in stocks in the short term. Earnings season will soon come to an end. Given the strength of the recent rally, profit takers will be tempted to take some money off the table. This kind of activity could easily drive the Dow lower by about 500 points or so. Be prepared to buy more of your favorite stocks when that happens.
