Is It Time To Worry About Stocks?
Its been a tough week for stocks. The Dow Jones Industrial Average and the S&P 500 are both down around 3.5% during that span. The Russell 2000 a good indicator of small caps has held up a little better, but its still down 3.3% over the same period.
So what gives? Isnt the economy getting better?
For the most part, the pullback in stocks is due to poor earnings. More specifically, many companies are lowering forecasts for the next few quarters.
Weve seen some pretty ugly results across the board from Google (GOOG) to IBM (IBM) to Du Pont (DD). There just hasnt been a lot to get excited about this earnings season.
But what about the economy? Hasnt the economic data been solid lately?
In fact it has. Housing starts, household spending, industrial production, and more have been better than expected. Even China is showing some signs of improvement.
Moreover, after this weeks Fed meeting, the central bank said the economy is seeing modest growth. Yet, with unemployment still elevated, there are no plans to slow the robust bond buying recently begun.
Keep in mind, thats $40 billion per month in mortgage-backed security purchases.
So, in a way, were getting the best of both worlds. The economy is doing better and the Fed is continuing their easy money policy.
Heres the thing
The Feds stimulus is also a big part of the reason why stocks are pulling back this week.
You see, when the most recent QE program was announced, it gave a boost to the stock market. With investor confidence returning, many stocks soared to overbought levels.
As such, mediocre to poor earnings served as a harsh reminder that the economy isnt out of the woods yet. Modest economic growth is not the same as robust economic growth.
With that being said, I believe the stock selloff is overdone. After all, most companies predicted a slowdown was coming. Theres only so much productivity and cost reductions that can be made to improve the bottom line.
At some point, revenue growth has to be a part of the equation.
Heres the good news
I expect well see better than expected revenue growth this holiday season. Retail spending has been rising and just in time for prime shopping season. Plus, the Feds stimulus program is not even two months old. It should lead to more business spending and home buying as it gains traction.
In a nutshell, I dont expect stocks to soar while earnings are disappointing. However, the economy is improving enough that any pullback should be short-term. And, the Feds monetary policy should provide a floor on stock prices as well.
Yours in profit,
Gordon Lewis
Category: Investing in Penny Stocks
