Investing in a Manic-Depressive Stock Market

With the stock market staging a sharp rebound from its summer-time selloff, there’s hope that the worst is over. But there are plenty of land mines ahead.

Sean Kelly

Stocks have staged a swift comeback in October following the 12% drop in the Dow Jones Industrial Average during the third quarter. Since hitting its 2011 low on Oct. 3, the Dow has bounced back 11%. For the week, the Dow was up 1.4%. The Standard Poor’s 500-stock index finished 1.1% higher, while the Nasdaq was off 1.1%.

To some degree, investors are caught in a tug of war. On the positive side, the U.S. economy seems to be avoiding recession and instead is muddling along in a slow-growth mode that could be supportive for stocks. Corporate earnings have remained robust.

 But Europe remains on the precipice of financial turmoil and recession. Until the debt crisis is decisively dealt with, it could be tough for stocks anywhere around the world to enjoy any kind of sustained gains. Furthermore, markets are likely to remain exceptionally volatile—taking investors through the kind of wild ride seen over the past few months.

 The Dow has moved up or down more than 1% on 43 days since June 30—the kind of frequent big swings not seen since the worst of the 2008-2009 financial crisis.

First, Europe

This weekend, European officials are gathering as part of critical meetings to again try to move closer to ending the nearly two-year-old debt crisis. “Europe is the story—everything else is a sideshow,” says Robert Doll, chief equity strategist at money manager BlackRock. “No matter what we get this weekend, it’s not the end of the story. There’s still a lot of work left to do.”

Enlarge Image

It’s not just the saga in Europe that presents potential trouble spots for stock investors. Next month, the budget mess in the U.S. will be back in the limelight as the congressional supercommittee faces a Nov. 23 deadline to come up with massive cuts to the federal deficit. And in the background are worries about China’s economy and financial system.

Fueling the stock market’s rebound has been a run of news on the U.S. economy that came in much better than economists had predicted. That included a stronger-than-expected report on the jobs market for September, buoyant retail sales and perkier-than-anticipated news on manufacturing.

“We’ve had a pretty nice stack of good news,” says Liz Ann Sonders, chief investment strategist at Charles Schwab.

These reports helped soothe fears that the U.S. economy was about to slide back into recession. “Saying that the U.S. isn’t likely to have a recession is easier to say [now] than two weeks ago,” says Mr. Doll.

Not only have the data come in better than expected, he says, but as BlackRock analysts talk to companies, “through this period, they’re saying ‘My business is OK.’ “

Ironically, the ability of the U.S. to avoid recession—usually defined as two consecutive quarters of declining economic activity—may be that much of the economy never recovered from the 2008-2009 downturn.

Housing and autos, for example, “are still in the basement,” notes Mr. Doll. Meanwhile, “corporations don’t have excess inventories and don’t have excess workers. In fact, that’s why corporate earnings have been so much better than the economy.”

Muted Optimism

But investors shouldn’t get too exuberant about the outlook for the U.S. economy. “None of the [recent data] suggest a booming economy,” says Schwab’s Ms. Sonders. “They just point against a recession.”

Unfortunately, the mess in Europe presents real risks. With the crisis approaching the end of its second year, European officials are struggling to find a way to manage the fact that Greece is basically broke and unable to pay its debts.

The big economies of Spain and Italy remain threatened by spillover from Greece. And Europe’s largest banks face big losses on holdings of Greek and other European government debt.

The fresh challenge is that the crisis is finally taking its toll on Europe’s economy and many economists believe a recession on the continent is imminent. Even if Europe avoids an actual downturn, efforts by governments to slash spending mean growth is likely to remain extremely weak for some time.

This is no small matter for even U.S. stocks, says Vadim Zlotnikov, chief market strategist at AllianceBernstein Investments. Roughly 20% to 25% of the profits earned by companies in the SP 500 come from Europe, he says.

“If you don’t have a resolution in Europe, or the resolution is an extremely painful one…it would not only affect U.S. companies’ earnings, it would cause a faster deceleration of the economy in China and put additional downward pressure on commodities,” he says.

As long as Europe avoids the crash-and-burn scenario, Schwab’s Ms. Sonders says U.S. stocks could actually do relatively well even if the U.S. is in a muddle-though economy.

A slow-growth environment “tends to offer fairly consistent returns,” she says. Expecting that kind of slow-growth landscape, Ms. Sonders likes technology, thanks in part to continuing business investment, and industrial stocks, for their strong balance sheets and expected pickup in capital spending. She expects defensive sectors, such as consumer staples and utilities, to underperform in an environment where investors feel more comfortable with the stock market.

Cash Is King

BlackRock’s Mr. Doll thinks in the near term, the stock market will be stuck bouncing back and forth until there is clarity on Europe.

Apple (APPL), Microsoft (MSFT), Phillip Morris International (PM) and Exxon Mobil (XOM).

Mr. Zlotnikov at AllianceBernstein also leans toward companies with strong cash flows, but he worries it’s too much of a popular trade. He prefers to balance out a portfolio with cheaper cyclical stocks, such as those in the semiconductor capital-equipment industry, media, autos and housing.

In a manic-depressive environment, where the market swings back and forth between hope and fear, the strategy is to harvest profits when one side of the portfolio gains and put it into the portion that is lagging. That side should then gain when sentiment shifts. “Then you should do OK almost irrespective of the market,” Mr. Zlotnikov says.

Write to Tom Lauricella at [email protected]

Article source:


Leave a Reply

Other News


    Umthethwandaba Ophezulu Unquma Ukuthi Okhansila BeMDC Ekhokhelwa NguMnu …

    Umthethwandaba Ophezulu Unquma Ukuthi Okhansila BeMDC Ekhokhelwa NguMnu. Tsvangirai EHarare Aboxotshwayo Babuyele Emsebenzini Abane laba babalisa okhansila Paul Gorekore, Johnson Zaranyika, Maxwell Katsande, lo Silas Machete abamela amawadi aseMbare, Dzivarasekwa, le Tafara. Ngu Sithandekile Mhlanga | Washington Umthethwandaba ophezulu eHarare usunqume ukuthi okhansila abane balelidolobho abaxotshwa emsebenzini ngumphathintambo wezabelo uMnu. Ignatious Chombo ngomnyaka odluleyo babuyiselwe ezikhundleni zabo ngoba bengelacala. Abane laba babalisa okhansila Paul Gorekore, Johnson Zaranyika, Maxwell Katsande, lo Silas Machete abamela amawadi aseMbare, Dzivarasekwa, le Tafara. Kuviki edluleyo, [...]

    Read more →
  • FEATURED Indigenisation should not be political rhetoric

    Indigenisation should not be political rhetoric

    Morgan Tsvangirai Responding to questions from parliamentarians at the inaugural Prime Minister’s Question Time in Parliament today, Tsvangirai said the issue of indigenisation should not be based on political rhetoric, but should be based on one clear government policy. “The issue of indigenisation is of national concern. We need to promote not damage investment in the country,” He said. “The idea is not to share a small cake but to grow the cake that people are able to share. We [...]

    Read more →

    Air Zimbabwe trying to secure French planes amid sanctions

    Air Zimbabwe is reportedly struggling to register two airbus planes it bought from France because of European Union sanctions imposed on the southern African country. Details emerging from several Air Zimbabwe sources reveal that the planes were bought through China Sonangol, a Chinese controlled oil company based in Angola. Sonangol was reportedly roped in to circumvent the sanctions slapped on Zimbabwe in 2002. Aviation sources said Eads, the French aircraft manufacturer was the supplier of the planes. The sources said the [...]

    Read more →
  • FEATURED Registrar General faces court action after refusing Zim man passport

    Registrar General faces court action after refusing Zim man passport

    Registrar General, Tobaiwa Mudede By Alex Bell 26 October 2011 A Canadian based Zimbabwean man has taken ZANU PF’s Registrar General, Tobaiwa Mudede, to court over Mudede’s refusal to grant him a passport. Mudede’s office has refused to renew Sebastian Piroro’s Zimbabwean passport which expired last year, after the office discovered that his late father was born in Mozambique. According to the RG’s office although Piroro was born in Zimbabwe more than 40 years ago, the fact that his father [...]

    Read more →
  • FEATURED Zimbabwe PM Tsvangirai Attacked Over Gay Rights Remarks

    Zimbabwe PM Tsvangirai Attacked Over Gay Rights Remarks

    Zimbabwe PM Morgan Tsvangirai was hammered by members of his own party for comments he made to the BBC this week in support of constitutional protections for gay people, Zimbabwe Metro reports: Justice Minister Patrick Chinamasa claimed Tsvangirai’s call was dishonest, insisting: “I know personally he doesn’t believe it. He has said so many times in the Cabinet.” Tsvangirai’s MDC-T party refused to back him, and his spokesman appeared to beat a retreat, suggesting that the Prime Minister’s position expressed [...]

    Read more →
  • FEATURED Zimbabwean Lydia Werrit granted three more years in UK

    Zimbabwean Lydia Werrit granted three more years in UK

    26 October 2011 Last updated at 09:49 ET Lydia Werrit fled Zimbabwe when Mugabe supporters seized her farm An 88-year-old Zimbabwean woman living in Kent who was facing deportation has won a three-year reprieve. Lydia Werrit has been living in Hythe with her family since supporters of Robert Mugabe seized her farm in 2003. A UK Border Agency spokesperson said: “Given the special circumstances, we have decided to grant three years’ discretionary leave to remain.” Ms Werrit’s daughter Sophie Laubscher [...]

    Read more →
  • FEATURED Zimbabwe foreign minister urges reform of U.N. Security Council

    Zimbabwe foreign minister urges reform of U.N. Security Council

    Harare, Zimbabwe (CNN) — Zimbabwe’s foreign minister is calling for reform of the United Nations Security Council following the “extrajudicial” killing of Libyan leader Moammar Gadhafi. NATO’s role in Libya highlights the need for more democracy and accountability, Simbarashe Mumbengegwi said late Tuesday at a celebration to mark the anniversary of the United Nations. Gadhafi’s “brutal extrajudicial killing” shows the Security Council is not accountable to member states of the U.N. General Assembly , he said. The former leader was [...]

    Read more →

    Switzerland Denies Mugabe Entourage Visas

    Zimbabwe President Robert Mugabe has canceled plans to attend a United Nations meeting in Switzerland this week after his wife and five aides were denied visas. State media on Wednesday quoted an unnamed foreign affairs official who called Switzerland’s decision on the visas “highly regrettable.” The official accused Switzerland of violating the U.N. host agreement and Zimbabwe’s right to select its own delegation. The Swiss Embassy in Harare has declined to comment. The European Union and the United States have [...]

    Read more →