Jul

3

The Stock Market Cycle, Corrections and Savings

Posted by cameron

July 3, 2007 |

2007 is shaping up to be a watershed year for investors. The U.S. economy came as close as it could to a recession during the first quarter and things could have gone in either direction. Indications are that growth will have picked up during the second quarter, albeit at a restrained level. Looking back at the charts has shown a continued economic deceleration for many past quarters to a possible bottom in that first quarter. Another two or three quarters will be necessary before anyone can really say that was the bottom. Still, current information leads me to believe that we are at or close to bottom. This is important to understand because if this year is the end of the late stage cycle then a new bull market will begin. We all love bull markets.

Quite independent of that, there has been an increased risk of a major correction due to several factors. The run-up this year to new stock market records, continuing inflationary pressure as measured by the core CPI, full employment and wage pressure and on and on. Two months ago I took up a more conservative position protecting against a possible correction, even though I am becoming convinced about the economy achieving a soft landing. I see the possible correction as being a short-term issue because I think the soft landing is probably already achieved. We need a bit more time to truly determine that. Even if we do slip into a recession it looks likely that it will be mild. Last weeks core inflation number moved into a range the Fed wants to see, which, in my mind, removes the need for a Fed rate increase. Some interest rates have risen without any help from them, which weakens the chances of Fed action. From my perspective, I want the Fed to stay on the sidelines. I want them to do nothing. I don’t need this uncertainty.

The stock market is going through large gyrations but seems to keep coming back to a point of equilibrium. Market P/E ratio is not out of line with historical norms, at least those associated with large pullbacks.

I hear nothing but bad news about Bonds. If you read Juback at MSN Money, he is a worried man. The quality of Bond offerings is under scrutiny and in his words they look rotten. Cash interest rates have risen to compete with bonds. So what is one to do? Personally I don’t have much time for Bonds right now, cash and stock is it.

I have been wondering how many times the market needs to go down by 400 points before any selling pressure is siphoned off. It seems to me that if these wild gyrations go on long enough then all those who want to sell will be out of the market and the threat of correction will be gone. I don’t know if that is real or just my own theory but I sense the market is not panicking on the downturns, moreover it just bounces right back. If you believe in the soft landing then buying on the dips is what you do.

So what am I to do? The prudent approach now appears to be to dollar cost average some cash back into the market over these summer months. That allows more time and data before becoming fully committed to the next early stage bull market but doesn’t let me miss it if it is real. So that’s my plan. The 5-year rule is always in play though. That is, any money I need in the next five years stays in cash. Cash is currently delivering more than twice the return of core inflation.


Comments

Name (required)

Email (required)

Website

Speak your mind

<< Post Navigation >>

« « Princes Plan Celebration Of Diana’s Life | Independence Day » »



-->