Bright Spots in an Iffy Economy

by: Kenny Landgraf

The equity markets continue to buckle under an increasing weight of negatives including:

  1. Uncertainty of government debt limits and a game of chicken by the White House and Congressional leaders.
  2. The hair cut in discretionary spending with high oil and gas prices.
  3. Increasing weak “soft patch” economic numbers and a lack of corporate earning releases.
  4. The depression of active traders that the Fed is done with QE2 and has no plans for QE3 on the horizon.

Every time the Fed unleashes QE, it also unleashes unintended inflation in commodity prices. More and more it is looking like a replay of summer 2010, although it is hard to see QE3 come to the rescue of the market this time. The president is out of “stimulus arrows” in his quiver, with a Republican House opposing his ideas to stimulate the economy. Keynesian economics to stimulate this economy has been a failure. Add to that the doldrums of summer and no more earnings until July, and it seems that the market cannot buck the negative weights.

Okay, here is the positive news. First, investor sentiment is terrible and reaching the bearish extremes reached on Aug. 26, 2010. The market is deeply oversold, but could go lower if we break current technical levels. Second, the market from a fundamental perspective is cheap on a PE basis, with a forward PE of 12.27 where the long term average is 16. Third, we are in the third year of the presidential election cycle which is the strongest year of the cycle. It will continue to be a rough ride for the summer but seasonal forces will bring investors back in the fall and we should see nice equity gains by year end (we hope).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.