You’d think this was Pamplona, Spain but no, that rumbling sound you hear in the equity markets is the sound of optimism in the form of investors shopping frenetically for bargain stocks. The recent announcement by the Federal Reserve Board and the Obama Administration to improve liquidity in the U.S. economy by buying up long term U.S. debt securities and toxic assets from the private sector is the cause of this. Most critics will argue that this will only increase America’s economic problems, but I say yes and no. Yes, because this lowers the dollar’s value and increases inflation and the public debt; no, because we avoid deflation, stimulate spending, and not have to fully rely on foreign governments to buy up our debt. Essentially, the Federal Reserve is printing more money (monetary policy) instead of the government using taxpayers’ money (fiscal policy) to improve the status quo.
With this action by the government, I can now declare with confidence that the fear is out of the markets. But don’t confuse fear with uncertainty. It took about a year for economists to confirm that the U.S. economy was in a recession and thankfully I do not think we have to wait for another year to hear that we are in a depression because, quite frankly, I think we just avoided one.
However, with the fear gone, due to the expected extra liquidity in banks, I still think that uncertainty will continue to linger on and high volatility in the markets will remain. April and May are two key months that will set the tone for the remainder of the year. Key reports that come out in those two months are US Trade balance data (Apr 9), the 2009 Quarter 1 GDP report (Apr 29), and unemployment data (May 8). If all these reports are able to meet or beat analysts’ expectations, I believe that the uncertainty in the markets will substantially decrease and that consumer confidence will begin to regain its footing.
So, have we reached a bottom or are we near one? My answer: Sort of. Although, I do not prefer using stock indices to represent the U.S. economy or it’s future performance, I will use the Dow Jones Industrial Average for tradition’s sake. With that being said, I am going to say that we are near a bottom and predict the range of 6400-7000 as the bottom for the Dow Jones Industrial Average; the S&P 500 is a harder read since it fell too fast for my comfort in 2008. The caveat: this all depends on actions taken towards improving world trade and how soon the Federal Reserve’s plan actually gets to the private sector, specifically, small businesses and consumers.
My advice to investors in 2009:
Short term investors should buy up bargain stocks with attractive dividend yields to counter higher capital gains tax.
Long term investors (5+ years) should buy up both dividend yielding and non dividend yielding bargain stocks to benefit from a lower capital gains tax and/or high dividend payout.
March 17th, 2010 12:55
There is apparently a lot for me to study outside of my books at http://www.kevinwoghiren.com/2009/03/the-bulls-are-back/484. Thanks for the great read,
April 15th, 2009 07:33
I read your blog for quite a long time and must tell you that your articles always prove to be of a high value and quality for readers.
April 8th, 2009 22:15
The topic is quite trendy in the net at the moment. What do you pay attention to while choosing what to write ?
April 2nd, 2009 23:30
I usually don’t leave comments!!! Trust me! But I liked your blog…especially this post! Would you mind terribly if I put up a backlink from my site to your site?
April 3rd, 2009 12:19
Go ahead
March 24th, 2009 16:57
Hello,
I am really excited to see how the world is going to react to the new world currency that is going to develop. Russia first proposed this idea and now China is also backing the idea. In addition, I think the government is acting to fast without thinking of the long term effects carefully enough.
Ali
March 24th, 2009 16:39
Dear Mr. Kevin,
I do not agree with your point of view about long term investing. This new toxic plan and buying of debts is a bandage on a wound. What got America into this problem was overlevearage and debt. Yet no one has addressed this problem but the government is again promoting such non sense.
March 24th, 2009 16:44
Hey Ali, point well taken but sitting around and not applying a bandage will only cause an infection and make matters worse. The printing of a trillion dollars to increase liquidity is a good last resort (and our only option to increase liquidity) action and even though we face rising inflation, this will bolster world trade with a weaker dollar. I’m curious to see what the G20 Summit comes up with in April.
March 18th, 2009 23:03
While i do see your point and agree that we can not base our decisions mainly on stock prices we should take a look or in depth about them. The consumers who have been holding out due to the so called greed effect, will now start to buy in because people are starting to see how cheap it is. I think that the low of the market is soon if not happening. New innovations are happening and people are rethinking their investments and future purchases. THe markets will lift soon as will the amount of people willing to invest and put their trust back into US companies.
March 18th, 2009 23:00
Hi there,
I looked over your blog and it looks really good. Do you ever do link exchanges on your blog roll? If you do, I’d like to exchange links with you.
Let me know if you’re interested.
Thanks..
March 18th, 2009 23:10
I have never done so but would be open to it.
March 18th, 2009 23:00
Hi,
I’m just getting started with my new blog. Would you want to exchange links on our blog-rolls?
BTW – I’m up to about 100 visitors per day.
March 18th, 2009 23:11
Sure.