Miss This Rally? Look On the Bright Side

Much is at risk in the economy, but markets could still show strength.

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Tim MicKey

The U.S. markets have been climbing a wall of worry for some time now. A positive 15 percent move in the S&P 500 index in the past three months is more than what most investors expected. Yet here we are: looking at the S&P 500 up nearly 15 percent this year and showing some resilience despite plenty of negative headlines. I have heard it said that this is one of the most hated rallies in recent history because so many people have been left on the sidelines. Many individual investors now feel like they have to play catch up and invest at higher prices for fear they will be left behind if the markets continue to rally.

What many find puzzling is that there is nothing new in the headlines. People are still protesting in the streets in Europe, China’s growth rate is still slowing, the unemployment rate is still stubbornly high, and the U.S. is still looking at a substantial budget deficit with no clear plan on how to reduce it. These are all real concerns individually and, when added together, hardly make a case for wanting to invest in the market. What is the average investor missing? What does the market see that some investors don’t see or at least don’t believe? Has the average investor become so accustomed to bad news that he doesn’t expect things to improve? Or does the average investor think the market has gotten ahead of itself and doesn’t want to get caught holding the bag when things come back down? Only time will tell but the 2012 rally has left many people on the sidelines.

Emotion certainly plays a role in investment. Historically, the average returns of retail investors lag those of institutions. One explanation is that institutions don’t make emotional decisions. They are much more likely to buy than sell when markets are low, while the average investor might feel extreme anxiety with this decision. Institutions also tend to have specific profit-taking strategies, which are almost nonexistent among retail investors.

Markets

I don’t know why so many people missed the recent rally. Nor do I think that I can predict the direction of the market. But I can bring up a few points that many investors may have overlooked. I can point out some recent changes in the economic data along with some long-term projections for the economy. Markets may be performing better than expected because institutions are looking ahead: they are projecting valuations based on future earnings and cash flows. This could explain why the market has long been considered a forward economic indicator.

So, what has the average investor overlooked? Well, the housing market seems to have finally bottomed out. Census Bureau data shows housing starts and permits rose substantially in August, and the National Association of Realtors stated that builders started new home construction at an annual rate of 750,000 homes. That is an increase of 29.1 percent over last year. The Federal Reserve has once again stepped in with an effort to keep interest rates low for the foreseeable future. This Fed action has helped keep mortgage rates to historic lows, which should help to ensure a further recovery in the housing market. A recovering housing market goes a long way to adding jobs and building consumer confidence.

Take a look at corporate earnings and you will find that 71 percent of the S&P 500 companies exceeded their estimates for the second quarter of 2012. According to Bloomberg, earnings are forecast to reach a record $103.53 a share in 2012. An increase in corporate earnings estimates is generally considered a positive indicator of future economic activity. Additionally, U.S. auto sales in August beat estimates and are on track to exceed 14 million vehicles this year, the highest since 2007.

What are other major factors that could influence our economic future? The possibility of the U.S. becoming energy independent could play a major role in helping to solve a number of issues. It has been estimated that becoming energy independent could add 3.6 million new jobs. That alone would go a long way to helping reduce the unemployment rate. It could also lower the cost of energy across the board and make the U.S. the world’s low-cost provider of natural gas. Improvements in the mining, distribution and consumption of natural gas are happening on a regular basis. The use of natural gas could bring down the cost of manufacturing in the U.S., which in turn could create jobs and further add to economic growth. Also, a significant reduction in the amount of money sent abroad for foreign oil could help fund much needed infrastructure, education and health care projects that could go a long way toward improving our country’s fiscal situation.

Also, some evidence that manufacturing is coming back to the U.S. has appeared. Toyota now has a plant in the US to build cars and export them to the rest of the world. Why? Because the cost of both manufacturing and labor in the U.S. are lower than they have been in years.

There are still plenty of concerns that investors should be aware of that could have a significant impact on the U.S. economy and markets. But there is also much that could go right.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Timothy S. MicKey of Monument Advisory Group, a registered investment advisor and separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All indices are unmanaged and may not be invested into directly. All performance referenced is historical and is no guarantee of future results.

Timothy S. MicKey, CFP®, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor, member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Tim and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth and @TimothySMickey, and on their Facebook page.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Timothy S. MicKey of Monument Advisory Group, a registered investment advisor and separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All indices are unmanaged and may not be invested into directly. All performance referenced is historical and is no guarantee of future results.