The first 10 months of 2010 have been pretty good for investors in most of the major asset classes. Just a few short months ago investors were quite pessimistic as the first correction of the new bull market larger than 10 percent occurred in May and June, convincing many that Armageddon II was just around the corner.
My belief was that it was a normal correction after a large move up for major stock market averages since the spring of 2009. As I write this, those major stock indexes are up in the 10 percent range so far this year. As usual, there are about as many pessimistic prognostications on CNBC and MSNBC as there are positive ones.
I, for one, even when trying to temper my natural optimism, am finding some reasonable basis to believe that the next several months, and perhaps even the next year or so, could be very positive for investors in the stock of quality corporations. There are four points, which I believe are important to consider ,and with the disclosure that no amount of historical precedent, opinions or indicators can guarantee success, I would like to share those for your consideration.
1. Valuation – We all know that investing in what is the best value for the dollar is a great way to manage both household finance and investments. It seems the investment part comes hard to many, though when it comes to decision time. Presently, equities in general and specifically high quality, large U.S. corporations are priced at the lowest valuations we have seen in the last few decades. These firms as a group have record cash on their balance sheets, are buying back their own stock and increasing sales internationally, as well as here in the U.S., as the economic recovery continues.
2. Neglect – U.S. companies in general, are now owned in the smallest proportions in both institutional and individual portfolios, as we have seen in the last three or four decades. Why is this important? When legitimate asset classes are ignored, they tend to represent the best value as described in #1 above. Eventually, this value tends to be recognized once most of the possible gains have been realized in the other asset classes and the money begins to flow back to the neglected class. It is this money flow which causes the price of the neglected investments to eventually rise.
3. Seasonality – Seasonal patterns are by no means any form of guarantee, but the trends of the historical period we have just entered are the strongest of any and also should not be ignored in my opinion. It’s no secret that, on average, stocks perform better in the period from November through April than in the other six months of the year. Slightly less well-known is how powerful this period is when it is combined with the mid-term national election cycle. In the last 60 years, there have been no periods where stocks declined from the date of the mid-term election through April of the following year. Even more compelling is the magnitude of the gains experienced with the average result in the last 15 mid-term election November to April period results averaging over a 16 percent gain in the six month period for the S&P 500.
4. Big money – Again, no guarantees, but I like to watch the very large investors and their activity in the futures markets. Large institutional investors use futures contracts of certain types to make bets on the direction of the stock market (as well as other assets) over periods ranging from a few weeks to a few months. At the moment, the positions in these contracts are indicating about the same level of commitment to stocks as these investors as a group established in March of 2009, right as the financial crisis was ending and the stock market was preparing to rise dramatically, as we now know in hindsight. We prefer to act more like these investors than the average small investor, who has traditionally been wrong at major market turning points.
When many compelling factors start to line up on one side of an issue, you can ignore them, but it may be at your own peril. Of course, just as in life, there are never any certainties in investing, and each individual should use a common sense approach to risk taking and designing his/her investment plan.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.