The consensus on the U.S. economy is still rather skeptical even considering the 100% return the S&P 500 has posted since bottoming in early March 2009 at $666. The majority of U.S. consumers, investors, and economists, all seem to be anticipating some significant headwind that will cause stocks to sell-off considerably. After watching their investments tank in 2008, most investors still do not trust the stock market completely and feel uncomfortable putting a large sum of their money into it. Needless to say, their attitude and outlook is, at best, cautiously optimistic and hesitant. To quote perhaps the greatest investor of all time, Warren Buffet, “One should be greedy when others are fearful and fearful when others are greedy.” Buffet has without doubt profited from this approach. In 2008, when everyone else was panicking and dumping stocks, he was buying the best of breed names such as Goldman Sachs (NYSE:GS) and General Electric (NYSE:GE). I believe at this point in time, fear still outweighs greed considerably. Investors, who got burned in 2008, do not want to buy into the stock market right now because they feel they have already missed the run up. They are fearful and uncertain as to what they should do with their money, which is primarily invested in cash and bonds. On the other hand, many traders, institutions, and economists believe there is another shoe soon to drop, which will depress the economy further. When asked what the shoe to drop will be, the consensus opinion usually ranges from a collapse in the commercial real estate market to rising oil and commodity prices. These individuals are either sitting on the sidelines in cash or positioned for a decline in stock prices.
It is important to note that a number of very vital indicators have changed for the better since 2008. First, stocks have risen sharply from their depressed levels. This rise has been due to increased demand for goods and services both domestically and internationally, lower inventories and supply, and more efficient cost management and production methods. Secondly, although the economy lags the stock market, it has without a doubt gotten much better. Corporate profits are at all time highs, companies continue to raise their outlooks and guidance, growth in emerging markets continues to flourish, the trend in weekly unemployment claims is now declining, labor costs are falling, and the U.S. service sector, which comprises two-thirds of the American economy, is growing and at a 5-year high. These are facts not opinions. When one combines these positive indicators with the still fearful, doubting, and cautious sentiment of the average U.S consumer and investor, it seems that this great bull market in stocks could still have a long ways to go. It is no wonder why Warren Buffett is still extremely bullish on the U.S. economy. As he stated in his annual shareholders letter released on February 28th, “Money will always flow towards opportunity, and there is an abundance of that in America.” Buffett’s Berkshire Hathaway company (BRK-A and BRK-B) is also a clear example of why the bull market in stocks is far from over. The company is sitting on $38 billion in cash, with this position likely to grow as Goldman Sachs and GE buy back their preferred shares from the company. Buffett has openly declared that he is anxiously seeking to put a large sum of this cash to work in the stock market soon, specifically through a megadeal. As he states in his annual shareholders letter, “We are prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.” Berkshire Hathaway cannot be the only company looking for deals in this market. I assume there are many other savvy institutional investors with itchy trigger fingers that could pounce on stocks given even the slightest pullback. Also, Berkshire Hathaway is without question not the only company with a massive amount of cash on its books. If this cash soon begins to flow off the sidelines and into the market, it should act like gasoline on a burning fire. Investors should be prepared to buy the stocks of the best of breed companies on any pullback. They should also understand that bond prices could soon begin to fall for two reasons: 1.) potential inflation and rising interest rates, and 2.) investors selling their bond positions and reallocating their money into stocks.
The stock sectors that should outperform going forward: banks, construction, shipping, data protection technology, alternative energy, commodities, utilities, and pharmaceuticals.
Bullish: BRK-A, BRK-B, AB, OXPS, DB, CS, BCS, C, BAC, HRB, MTZ, KBH, ITB, IRM, VDSI, ASIA, INTC, TTEK, TOT, SD, NG, FE, NRG, PPL, FRO, NAT, ABT, GSK, PFE