- A U.S. recession was on the table at the beginning of the year, a few economic data points recently reported were positive.
- Interest rates, inflation and oil prices remain low, and are good for the economy and asset prices.
- Oil and many commodity prices have recovered relieving concerns of defaults from energy and commodity related companies.
- China and the global economy are slowing
- China’s slowing and change of focus from investment, manufacturing and exports to a consumer and services focus are causing disruptions in the Chinese and global economies, especially resource based economies and countries.
- Latest terrorist attacks are bad for the European Economy, and its anemic growth
- Isis and the Middle East create uncertainty, instability and danger
- Earnings continue to be revised downward
- Markets are now overvalued
- Global central banks, and especially ours, are running out of effective monetary bullets to help our economies, especially if we have a global recession or major financial crisis
- We are seeing headlines of a potential global recession
- The collapse in oil prices is hurting many energy based economies (Russia, Mexico, Venezuela, Nigeria….). Low oil prices are also hurting the U.S. energy industry and we’re seeing more layoffs, bankruptcies, and banks are worried about more energy loan defaults.
- Credit spreads are wide, (investors are selling low quality bonds and buying treasuries and safer debt) and are normally a reliable predictor of recessions.
- The technicals for the markets remain bearish
- This economic and market cycle is maturing and may enter a decline phase (some indexes have entered decline, bear markets).
- The Fed may raise interest rates at least one more time this year. This could be disruptive to the debt and equity markets.
- The elections are causing concerns among economists, analysts and investors.
Below is the current consensus earnings 2016 forecast for the Dow 30:
Stocks in red font are expected to have losses, and stocks in pink highlight have growth less than 5%. More than half the companies in the Dow 30 are expected to have losses or with growth less than 5%.
Most of the stocks that have good growth prospects are overvalued as shown by their high P/Es in yellow highlight.
Price targets are difficult when earnings keep contracting, but to get an idea on where market valuations could be, let’s use current consensus earnings forecasts:
Currently, the markets are overvalued.
Fundamentally the economy is fine with job growth, low inflation and interest rates, and slow economic growth. At the current price level, above 2,000, the markets are overvalued.
When prices get to support levels around the 1,820 area, the markets are undervalued if: earnings stop contracting, and the economy and job creation continue.
This scenario could be good for traders. They would buy at the support area, and sell at the resistance area.
The elections could also be key. Normally when there is a dramatic shift in priorities and economic policies, the U.S. has a period of adjustment that have been difficult for the economy and the markets.
Investors should raise cash, especially if you’ve been in this market since 2009. Here are some of the reasons to do so:
- If you’ve been in this market since 2009, take profits.
- The markets look bearish, and if we go into a recession it could last longer than most recessions.
- Minimize the losses and emotional pain of a bear market, between 20 to 36%.
- Have cash available to take advantage of lower prices and valuations.
- Each bull market cycle averages about 125% appreciation and dividends. If you have $500,000, in 6 years that could grow to about $1.125 million. If you don’t raise cash, your $500,000 could turn into $375,000. Six years later it could grow to about $843,000.