Market drop: Not all the news is bad

(MoneyWatch) The past few days have been poor for stocks, with the Dow Jones industrial average dropping 243 points on Tuesday and then essentially going nowhere the past two days. Many in the financial media have been quick to place the blame on a few bad headlines, which could cause investors to think the outlook is pretty bleak. However, there are a number of positive indicators you should be aware of as well.

First, the bad news. The Dow is now about 4 percent below its five-year high reached just before third-quarter earnings season began this month. The recent declines erased about $500 billion of value from U.S. stocks in a few days. The explanation for the selloff was that a large number of firms had reported revenue growth below forecasts.

Within the S&P 500 Index, 63 percent of the companies came in below analysts' revenue forecasts, well above the 38 percent sales-miss rate in a typical earnings season. Revenue growth has been disappointing because the eurozone is now in recession, China's growth has slowed dramatically and U.S. economic growth has slowed for the second straight year. In January, fourth-quarter earnings growth was expected to be 16.7 percent. It's now expected to be just 8.9 percent.

Of course, we still have ongoing bad news such as the "fiscal cliff," eurozone crisis, Chinese economic slowdown, and the upcoming elections to worry about. But before you fall into the trap of only paying attention to the bad stuff, let's look at some of the good news in the economy.

Housing

The housing market has not only bottomed out, but prices in most markets are now rising. In September, home sales came in at an annualized rate of 389,000, an increase of 5.7 percent from the August rate of 368,000. Through the first nine months of 2012, new home sales are up 21.8 percent from the first nine months of 2011. In addition, as demand rises supply is shrinking. At the end of September, there were only 145,000 new homes for sale in the U.S., down from 160,000 for sale at the end of September 2011. At the current sales price, there are only 4.5 months' worth of inventory on the market -- the lowest level in 7 years. And the median price of a new home sold in September 2012 was $242,400, up 10.3 percent from $217,000 a year ago.

Interest rates

Interest rates continue at record low levels, and the Federal Reserve has stated its commitment to a zero-rate policy through mid-2015.

Energy prices

Defying "expert" forecasts, energy prices continue to fall. Benchmark crude oil prices closed Wednesday trading at $85.69 a barrel. From January through June, it basically traded at more than $100 a barrel, hitting a peak of about $109 in February. This will help to keep inflation down and put more money into consumer pockets -- a fall in energy costs acts just like a tax cut.

Energy production

The U.S. is experiencing an energy boom, at least on private lands. Domestic oil and gas production has increased dramatically, helping to lower energy prices and reduce our dependence on foreign sources (thereby improving our balance of payments and helping the value of the U.S. dollar). In addition, the new hydraulic fracturing technology has opened up vast new sources of natural gas production, which has driven down prices and is now leading to a resurgence in U.S. manufacturing, as we have the lowest energy costs in the developed world.

States' financial health

The fiscal health of 48 of the 50 states has improved dramatically as they have taken significant steps to address their deficits. State tax revenues were up 3.2 percent in the second quarter, compared with the year-ago period, and have risen 10 straight quarters, according to the State University of New York's Rockefeller Institute of Government. Only California and Illinois continue to live in a dream world where you can make promises you cannot keep.

Consumer confidence

The Thomson Reuters-University of Michigan consumer sentiment index is at its highest level since before the recession. The index hit 82.6, its highest reading since September 2007 and is up from 78.3 in September. Bloomberg reported that the index is in line with other similar indicators, such as its consumer comfort index, which reached a six-month high last week.

Corporate finances

Corporate balance sheets are very strong, with companies sitting on $1.5 trillion, the largest cash hoard in history. In addition, more than half of companies in the S&P 500 beat their earnings estimates, despite more than 60 percent missing their revenue forecasts. That leaves valuations at very reasonable levels, with the S&P 500 now trading at about 14 times earnings. And with Treasury bill rates at effectively zero, from a historical perspective stocks could be considered cheap on a relative basis.

This list isn't meant to encourage you to buy stocks -- it's meant to help keep you disciplined. And that's the key to playing the winner's game in investing.

Money on chalkboard image courtesy of taxbrackets.org

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    Larry Swedroe is a principal and director of research for the BAM Alliance. He has authored or co-authored 12 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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