MARKET SENTIMENT - 2011/10/15
The last two weeks have been very important for the US stock market. It appears that the negative sentiment engendered by European debt crises has come to a short-term pause, and investors are back to analyzing the American economy in depth. Economic figures are coming in mixed, yet slightly positive, while 3rd quarter earnings, just beginning to come out, are highlighting a growth in revenue as well as growth in earnings.
As HRA has been positing for a long time, the fundamentals for U.S. growth stocks remain healthy, the economic figures are better than expected, and we see a long-term growth portfolio of stocks as a healthy investment.
Our HRA measure of market sentiment, or OU-P factor, is showing an under-priced value of over 24%, which falls into the fear category. This under-priced measure shows a market that is out of favor, which makes buying growth stocks at a low price a very reasonable investment, despite the risk of owning individual stocks. We suggest buying in to the stock market, for our aggressive investors, up to a 100% level, for that portion of their portfolio which is allocated to equities. Remember, not all investments are suitable for all investors, and investors should speak to their advisors concerning their goals and the suitability of changing their investment allocations.
What we’ve seen, in the last two weeks, is an overwhelming change in direction for equity prices in the U.S. market. The S&P 500 changed by a positive 8.2% in two weeks, which brought the month’s return to a positive 1.28%. Our theoretical portfolios, which retain much greater risk by being focused on growth stocks, and not nearly as diversified as the S&P 500, have a much greater reaction, risk, or beta, than the S&P 500, showing a return over 2 weeks of 13.8% for our Favorite 30, returning 1.52% for the month, while our Tiny 6 portfolio was up 18.2% in two weeks, and 1.81% over a monthly period. (Please note that our model portfolios are theoretical in nature, do not account for dividend income, trading costs, timing, or other costs associated with investing, but are meant to be measured against the S&P 500 for a pure, theoretical measurement of price returns over a period of time.)
Year-to-date, we’re seeing a market down 2.6% as measured by the S&P 500 Index, but with the onset of the fourth quarter which is historically one of the best quarters for equity returns, one can look at a one year measurement, where the S&P 500 Index is up 4.11%. We’re looking at a possible increase above expectations for the 3rd quarter of 2011, and HRA is hoping for a better 4th quarter as well.
On a fundamental basis, HRA believes that there are companies out there that will survive and prosper in the long-term. We are constantly looking for companies that have the ability to create good earnings, and are still under-priced by the market, for whatever perceived reason.
Some say that the current market volatility is being exacerbated by trading programs. What we’re seeing is outright FEAR, and when no one is investing in equities, that means that the prices are abnormally low, and for the long-term investor, it is usually a good time to buy solid company stocks that generate earnings. Some even distribute dividends, which can help investors on a total return basis.
HRA believes that if you look long-term, and are committed to a long- term strategy, stocks have to be a large portion of an investor’s portfolio, based on what is suitable for their needs.
With this hopeful outlook, let’s look at what’s been happening with HRA stocks.
WHAT DOES THIS MEAN FOR HRA?
Our HRA OU-P factor is showing the market as being underpriced by over 24%, which places the market sentiment in the FEAR category. Due to the recent market uptick, HRA is going forward with suggesting to aggressive investors a 100% equity investment level for their equity allocation for the 4th quarter.
Technology, manufacturing, healthcare and other sectors did very well in the first two weeks of October, and HRA believes that the fourth quarter, historically a good period for stock investors, will show continuing growth in the economy, and we hope to see market prices continue to increase throughout the period. As ever, there are always some good stock investments in any market – the hard part is choosing the individual companies to invest in.
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