Worried investors are currently controlling U.S. stock markets, despite abounding good financial news. That’s because when investors sell stocks--most typically via 401k mutual fund exchanges into money market funds and bond funds--portfolio managers need to liquidate stocks to cover the outflows. However, the portfolio managers themselves are probably not worried about U.S. stocks, because here’s what they’re seeing in the U.S. economy:
- There were 3 million new jobs in the U.S. last year, alongside increasing job hours and hourly wages.
- GNP is rising based on consumer purchases, ex-energy and materials.
- Chinese economic growth was reported at 6.8% in 2015, with another 6.0% growth expected in 2016.
- There’s such a lack of inflation pressure that the Federal Reserve continues to scale back its plans for interest rate increases.
- Banks are reporting strong earnings, liquidity and capital ratios.
- Merger & acquisition activity reached record levels in 2015.
All of these activities bode well for stock prices!
What’s more, we had great stock market news last week, when the S&P 500 index bounced at its August and September lows. While it’s too soon to officially pronounce the recent downturn “over,” I’m greatly encouraged by the trading pattern on the S&P 500.
While I select stocks based upon fundamental criteria (balances sheets, earnings, etc.), I put on technical (a.k.a. chartist) glasses when I eye current prices. When you look at price charts of stocks, market indexes and virtually all investments, what you see is a bunch of repeated trading patterns, interrupted by run-ups and price drops that are engendered by newsworthy events. When the news dies down, as with the recent oil price-induced stock market correction, the investment in question tends to settle, once again, into familiar trading patterns. From there, investors can decide how to proceed.
Like you, I want to see my stocks go up. The best thing I can do during a market downturn is to separate emotion from facts, watch for familiar trading patterns to resume, and identify investments to buy while their prices are low.
In the case of S&P 500 stocks, there are some that have already begun stabilizing, enough so that I would buy them today. Many others, however, have not stabilized; that is, their share prices have not found a definite bottom to their recent downturns. I ignore the ones that are still vulnerable, and concentrate my buying activity in stocks with more decisive chart patterns. I am confident that the others will catch up eventually.
And by the way, that confidence comes from the stock’s fundamentals. If we concentrate our investment holdings in financially strong, growing companies that have undervalued stock prices, we never have to second guess our investment decision. We know that our stocks have great outlooks. We just need to let the cream rise to the top after market corrections, and once again, we’ll accumulate capital gains.
