The dog days of summer have brought with them a lot of whimpering about the stock market. The truth is, things aren't as bad as they seem. At the risk of having a John Jakob Raskob moment, especially in light of the action this week, here are five reasons to be optimistic about the stock market right now.
1. The trading charts say so.
Technical analysis can quickly lead you into a rabbit hole of terminology like the Abandoned Baby formation or the Hanging Man. Feel free to ignore that stuff until you write your Wall Street thriller. You just need to understand one thing: while stock-trading data represents the sum of everyone's opinion on the market, many hedge fund traders and brokerage strategists study one piece of that data in particular—the 200-day moving average. For good reason. When the broad market indices fall firmly below the 200-day average, it signals an extended bearish period ahead. As long as the market is above it, things generally are biased to go higher. Trading in June was mostly an extended test of support at the 200-day moving average for the NYSE and Nasdaq composites as well as the S&P 500. The market passed that test, bouncing upward at the end of June. The last time we moved off the 200-day moving average was just under a year ago, when we had a great September to December bull run.
2. We've been through this before.
A bubble that bursts, big losses in the stock market, and a long economic recovery that never seems to quite get off the ground. This isn't the first time we've seen that scenario, except the victims this time have been homeowners, not day traders. Recall what occurred in the years after the dotcom bubble burst. The market bottomed out in 2002, then recovered modestly before hitting the summer doldrums in 2003. But then stocks rallied strongly in the last quarter of that year. The market did the same in 2004. Then again in 2005. Each time was a step higher that ended up generating 8% to 10% gains each year.
Could past be prologue? Certainly last year's stock market acted like 2003, and some analysts on Wall Street, including Barclay's Capital, are advising clients to expect the pattern to continue this year.
3. Stocks are cheap.
Maybe you're not sold on market patterns as a predictor of future action. That's okay. Let's look at fundamentals instead. Right now, the companies in the S&P 500 are trading at just 15-times trailing-year earnings, the cheapest the market has been since 1994. Looking ahead, the S&P 500 is telling us stocks are even more of a bargain, trading at just 13.6 times 2011 expected net income. And that's with the market already knowing the first quarter's results and having a good sense of how the second quarter played out, since the vast majority of early reporting companies have beaten expectations. By the forward P/E measure, stocks are the cheapest now since the end of 1985. If you invested in an S&P 500 fund then, you'd be sitting on a 530% gain right now. Just saying.
4. Oil and gas prices are falling.
At $3.62 a gallon nationally this week, gasoline is 85 cents a gallon pricier than it was a year ago. But compared to April, when the gallon price peaked this year, gas is 28 cents cheaper and well away from the $5 gas that pundits predicted would ruin our Independence Day. Just as rising gas prices hurt consumer spending, falling gas prices help. Oil futures have slid 16% since cresting at $114 a barrel in May. And guess what? The Department of Energy just finished accepting bids on the 30.64 million barrels of oil being released from the Strategic Petroleum Reserve. By the end of the month, at least some of that will be landing at filling stations and affecting gasoline prices where it really counts: in your wallet.
5. Consumer demand is growing.
There was one bright spot in the otherwise gloomy economic data that started this month: Consumer credit spending increased for just the second time since August 2008. When people charge more on their credit cards, it is a small sign they feel good enough about their financial picture that they can take on a little more debt, commit to a vacation, or simply buy more at the grocery store. Critics contend that uptick could have been spurred by May's high gas prices. But take a broader look and you'll see consumers are in a better position now than they have been in years, as far as their monetary obligations go. According to the Federal Reserve, the percentage of debt service payments to disposable income has eased to 11.5%. That's the lowest level in 16 years and down notably from the peak of 13.9% in October 2007.
The bottom line: Sure there are things to worry about (the debt ceiling, defaults in Europe, another season of The Apprentice), but keep some perspective. Just because the stock market and the economy aren't rushing at a breakneck pace doesn't mean there isn't growth ahead. It may just mean that, finally, we are starting to live in a bubble-free economy.
