MARKET SENTIMENT - 2011/06/30
HALVORSON RESEARCH ASSOCIATES, LLC.
The U.S. markets have had a rough June, yet have shown a distinct recovery in the last week. YTD, we see the S&P 500 Index up 5%, despite all of the outside and political influences that have seemed to dampen the economy’s recovery.
Outside the U.S., we see China increasing their interest rates, in order to slow their growth. In the European Union, more apparent is the attempt to shore up several nations that have been teetering on the verge of economic collapse, with the worst being Greece, a country which is highly dependent on tourism and that has a huge percentage of jobs coming from the government. Austerity measures voted in to that country are being protested, and if the country does not succeed in cutting spending, then we fear it will be the first of many countries to fall, with the rest going like dominoes shortly after.
Here in the U.S., our markets react to these outside influences, but the more important issues we face are political in nature. The debt issue is being debated, not particularly successfully, in Congress, and the fallout from the debate is the major concern for the U.S. market.
America needs to face the reality that our benefit programs are oversubscribed and underfunded. Issuing more debt to cover these programs is not the answer, and the Federal Reserve has announced the end of their treasury buy-back program, otherwise known as QE2. If the government does not realize real cuts in programs and try to reduce the amount of American debt outstanding, we are at risk of default at the worst, or downgrade by the credit agencies to less than “secure”. This sort of outcome will cause a huge effect in the market, mostly negative!
What we have been seeing, and is under-reported, is continuing economic recovery in manufacturing, earnings, productivity, and capacity utilization, despite a very sluggish job market. Jobs will follow, if companies are allowed to expand without having to deal with a flood of government regulations, which we see coming down the pike. The Obamacare health care issue is holding hiring back – no one wants to deal with the additional expense.
Can our economy, which is beginning to chug along on its own, survive the political atmosphere?
WHAT DOES THIS MEAN FOR HRA?
The recent recovery from the market swoon in June has created a market that is still under-priced by 5%, according to our HRA GOPF Index – we are still in the Pessimism range, yet almost ready to move into Optimism in market sentiment. Our portfolios of growth stocks, which are more volatile than the S&P 500, were down 3.6% for the Favorite 30 in June, and down 1.6% for the Tiny Portfolio, versus a drop of 1.8% for the S&P 500. Over one year, the S&P 500 Index has grown by 28%, while our Favorite 30 was up 40.6%, and the Tiny portfolio was up 32.3%. (Note that the Favorite 30 and the Tiny Portfolio are theoretical portfolios, which exclude trading costs, dividends, holding and management costs, etc. Please see our performance chart and disclaimer for more information.)
We are suggesting an 80% equity investment level for aggressive portfolios, looking for opportunities to invest further during the summer months. We are wary of international investments, as we’ve seen the dollar begin to recover, and the pressure from the international community will affect growth in several areas of the globe.
We are seeing a move up in under-priced technology stocks, after their second quarter swoon.
As the cost of oil has declined, we are seeing some price recovery in energy stocks.
Retail stocks, on average, are linked to consumer sentiment, as people will not be shopping if they feel bad about their situation. Jobs, the drop in real estate prices, the reluctance of banks to loan, as well as the doom-and-gloom nature of most news organizations, have put a lid on the consumer economy, and consumers are keeping their eye on inflation, especially in food and energy costs. On the flip side, if consumers expect prices to go up in the near future, spending on consumables may in fact be considered “smart” in the face of rising prices.
Health stocks remain a good area to be invested in, as America begins to unwind what Obamacare is about, and as the Congress debates several issues wrapped up in that health care bill.
We are seeing some change in the overall market sentiment, as we start to see an overall upward trend in market prices. Within this trend, we are seeing several industry sectors cycle through boom and bust, so we are being careful about being over-weighted in any one industry.
We are avoiding some defense stocks, in expectation of government cuts to spending, and we are cautiously optimistic about the retail and some transportation stocks.
So… we are real believers in investing for the long term, through under-priced growth stocks, and we encourage all investors to have a growth portfolio in order to participate in this type of growth.
HRA notes that not all investments are suitable for all investors: consult your investment advisor before making any major changes to your investments, and don’t forget to update your goals and risk tolerance as things change in your life and in the overall markets.
Good Luck, and Happy Investing!
Halvorson Research Associates, LLC
Janet Raphael, CFA Bill Halvorson, FSA Erik Hughes
239-738-4212 e-mail: JCR@HRAstockpicks.com