There's certainly enough bad news these days to make stomachs churn and investors push panic buttons. We've had a series of revolutions in the Middle East that have now threatened oil production. That has driven oil prices up to a 29-week high, which in turn has led to a rapid increase in prices at the pump. This is essentially acting like a tax on the American economy at a time when the recovery is still considered fragile.
On top of that we have crises in state governments, with Wisconsin's budget situation leading the headlines and the problems in California and Illinois continuing as well. On the fixed income side, we have Meredith Whitney and Nouriel Roubini forecasting a huge amount of defaults in the municipal bond market. We have the threat of a shutdown of the Federal government over a fight to extend the debt ceiling. And we have the ongoing problem of the Federal budget deficit, with no solution in sight for the real problems of entitlements. We have food prices escalating around the globe, increasing the risk of crises spreading beyond the Middle East. (And perhaps worst of all, we have a threat of no NFL season.) Any one of these issues might be enough to create a bear market. Taken together, the risk of a shock to the stock market certainly is of a concern.
Given all the bad news, it's easy to see how investors can become blind to the good news. And there's some good news. That's the point of this post: To make sure you're not losing sight of it. Remember the old saying from the news business: "If it bleeds, it leads." Bad news tends to attract more attention than good news. With that in mind, consider the following:
Unemployment For the week ending Feb. 26, the advance figure for seasonally adjusted initial claims for unemployment was just 368,000, a decrease of 20,000 from the previous week's revised figure of 388,000. This was the lowest level in over 2 Â½ years. The 4-week moving average was 388,500, a decrease of 12,750 from the previous week's revised average of 401,250.
Employers added 192,000 jobs in February, after having added just 63,000 the previous month. And the 63,000 figure was revised upward from just 36,000 and the December figure of 152,000 was revised upward from 121,000. Thus, including the upward revisions, we added 250,000 jobs. The unemployment rate also dropped to 8.9 percent, falling below 9 percent for the first time in nearly two years.
Manufacturing On March 1, the nation's supply executives, in the latest Manufacturing ISM Report on Business, reported that economic activity in the manufacturing sector expanded in February for the 19th consecutive month, and the overall economy grew for the 21st consecutive month.
Corporate Profits Corporate profit margins are near record highs of around 9 percent of GDP, well above the long term average of about 6 percent. This has helped restore health to corporate balance sheets which are in the best shape they have been in years.
Stock Valuations Despite the S&P 500 Index's doubling since the lows of March 2009, valuations look reasonable. According to Morningstar, as of the end of last year, the forward looking P/E ratio of the S&P 500 was about 13.6, probably close to the historical average.
Interest Rates Interest rates remain at very low levels. The 10-year Treasury note began the year yielding of about 3.4 percent. It closed on Friday at about 3.5 percent. And junk bond spreads, which had peaked at over 20 percent at the height of the crisis in 2008, are now at the lowest levels since the crisis began, around 4.5 percent -- about where they were in 2004.
As always, my crystal ball is cloudy. And stocks are always risky. Having said that, it's important to remember that if you know there's bad news (or good news), that information is already embedded in prices. And if you're always reacting to bad news, you'll end up like most investors, selling low and eventually buying high. The way to avoid doing so is to have a well-designed plan, one that makes sure you don't take more risk than you have the ability, willingness or need to take, and also anticipates that there will be bear markets. (Your plan must also recognize that you won't know when the bear markets will come, how long they will last or how deep they will be.)
Having that well-designed plan, and ignoring the news and the pundits that forecast the news, will give you the best chance of living through bear markets with the equanimity that will allow you to stay the course, rebalancing along the way (allowing you to buy low and sell high). That's the winner's game.
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