MARKET SENTIMENT - 2012/05/01

Two weeks ago, we were wondering whether the economy would continue to post consistently better numbers, or whether the slow recovery we’ve been seeing would be on its knees, which would affect most investors, making them afraid to hold stocks through the summer.

What has been coming out is steadily increasing numbers in manufacturing (which was a surprise this morning!), increasing numbers in housing and building numbers, decreasing unemployment, whether driven by increased hiring or more people dropping out of the employment picture, and a disappointing GDP number for 4th quarter 2011.

Are we entering a sideways market, as we’ve seen for the last two years? Most investors were happy to “sell in May and go away”. However, this year we are seeing increasing revenue and earnings growth here in the U.S., and even with an unclear picture of what will happen in the Euro-zone, even Britain is showing a bit more confidence in financials, led by Lloyds of London.

We also haven’t seen a “mad rush” of funds into the stock market. But where else can you get return without taking on a higher level of risk than these good growth stocks? We expect to see more buying in the market over the summer, especially if we have a short-term dip in prices.

We at HRA believe in investing for the long-term. We think that the summer months, if it is a sideways market, will provide some good opportunities to buy more of the names that we like (i.e. when volatility strikes, sometimes we can pick up a stock for a lot less than it has been trading at). Look at Apple Computer (AAPL). After showing great earnings and revenues, the stock dropped from a high of $644 a share on April 10, before their blowout earnings were announced on April 24, yet the stock price dropped fairly smoothly to a price of $583.98 on April 30.

We are seeing a lot of “bear” activity, based on companies that are showing solid growth, and although their guidance for future growth is much in line with expectations, investors are not getting excited about the news. So many good long-term picks may be looking at a short-term trading story full of higher volatility, profit-taking, and most likely, a short-term dip in price.

We at HRA do not believe that we will be seeing a recession within the next couple of years. We are hearing a lot of assent from market makers and centers of influence in the investing community. We are telling you, our investors, that the summer may provide some good buying opportunities, but we don’t feel that it is necessary to trim our holdings. Some rebalancing is always possible, taking profits and redistributing funds. We also will be watching for stocks that we hold to become over-priced, and we will take that opportunity to roll money from one segment to another. To reiterate our HRA mantra, for a long-term strategy, buying low-priced stocks that are showing good growth potential should be able to produce in any environment, and we also do not believe that you can effectively time the market.

The HRA OU-P factor, which measures market sentiment and the level of over- or under-pricing apparent in the market, is showing that the market remains under-priced by 18% based on the latest measurement of our 800 stocks, even after the S&P 500 return of 12% for the first 3 months of the year. This means that the investor who has been sitting on the sidelines could still be able to make money in the stock market through the rest of the year, although the risk level is getting higher.

On the more personal side, all investments should be based on the individual investor’s risk tolerance – if you want to be aggressive, and can live with volatility over the short-term, then investing in stocks over the long-term may provide increased returns along with that higher level of risk.

Remember, not all investments are suitable for all investors – check with a financial advisor if you plan to make major changes in your portfolio. Also, remember that historical returns are not predictors of future returns, and HRA does not believe that you can time the market. With those qualifiers, we at HRA wish you luck in your investing, and are here to answer your questions!