For most investors, the health of the U.S. economy should be the
most important item to track. How the economy fares will directly
correlate with how the Nasdaq, NYSE and S&P 500 perform -- over
the long-term. But right now, attention is focused on many
"outside" factors, most of which are more relevant to foreign
investors or short-term traders. If you let those factors rattle
you, you're likely to move to cash at the wrong time.
To be sure, the recent market weakness can test anyone's mettle.
But should we really be surprised at a -10% correction after we saw
the S&P 500 move from 700 to 1,200 in just 14 months? That kind
of +70% move is virtually unheard of, and should have led to some
near-term caution. But the pullback doesn't mean the rally has
ended. Indeed, the most important pieces of data are flashing
For example, the Institute of Supply Management's (
) index of factory activity in May has just been released, and the
rate of orders held steady from the prior month at 65.7. (Any
number above 50 indicates that the factory sector is expanding). In
addition, the ISM's employment index expanded last month from 58.5
to 59.8. That means that the monthly jobs report, due out this
Friday, is likely to be in line with or above forecasts.
Consumers Getting Stronger
As many headed off for a long holiday weekend on Friday, they may
have missed some important data regarding consumer spending. The
Commerce Department noted that consumer spending barely rose in
April after rising for six months. Bad news, right? Actually,
personal income climbed 0.4%, in line with recent monthly gains.
That means consumers are looking to bolster their savings and pay
off debt. The savings rate rose to 3.6% in April, from 3.1% in
March, and could well rise further as consumers remain cautious.
After all, the nightly news is in "scare mode" right now. That may
crimp spending in the near-term, but should set the stage for
stronger consumer balance sheets down the road. If household
savings keep growing, and if job creation continues, the economy is
very likely to get back on to a path of sustainable growth. It's
too early to sound the all-clear on the economy, but the scary
headlines out of Europe, the Gulf Coast and the Middle East are
decreasingly likely to have a major negative impact going forward.
More than likely, economic growth will not be robust this year, as
we're still feeling the after-effects of the global economic
malaise of 2008 and 2009. But the trend is positive, and growth
should become more inspiring next year and into 2012. And remember
that investors look six to 12 months ahead, so the market is likely
digesting the tepid growth outlook right now. By this summer, the
market should look ahead into 2011, and should like what it sees.
Action to Take -->
A wide range of stocks are starting to trade down from their highs,
even as the respective earnings outlooks are materially
strengthening. Companies that have pared expenses in recent years
can continue to show robust profit growth with just modest sales
growth. That backdrop fueled a powerful rally in the 1990s as
profit margins exceeded previous highs.
Here's just a sampling of companies whose shares have fallen more
than -25% from their 52-week highs while also seeing their earnings
estimates rise during the past 90 days:
Seagate Technology (
Integrated Silicon Solutions (Nasdaq: ISSI)
Deer Consumer Products (Nasdaq: DEER)
Electronic Arts (Nasdaq: ERTS)
Dell, Inc. (Nasdaq: DELL)
Denny's (Nasdaq: DENN)
If you've got cash to put into play, wait for days when the market
is sharply trading off. With all the daunting global headlines
right now, that's bound to happen soon. Happy hunting.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.