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Money Managers Got It Backwards Again

Monday, 17 Nov 2008 03:28 PM

Those of you that regularly read my Moneynews.com commentaries know that I’ve become much more positive since mid-October about the future direction of stock prices. That outlook is based primarily on the following factors:

(1) Numerous investor sentiment indicators suggest that most investors that were considering selling their equity investments have already done so. As a result, few potential sellers remain active in the equities market to push stocks significantly lower.

(2) The major stock market indices appear to be in the process of forming a triple-bottom formation, which suggests that stocks could soon surge, especially in the event of any major positive economic or geopolitical development.

(3) The kind of government representatives who tend to focus on ways to directly improve the livelihood of manufacturing and other blue-collar workers now control both the executive and legislative branches of the U.S. government, which strongly suggests that the government will implement a major fiscal stimulus plan soon after President-elect Barack Obama is sworn into office on Jan. 20, 2008.

(4) Several leading economic indicators have turned positive, which suggests that the current recession will end by mid-2009.

(5) Stock prices tend to bottom and to then trend higher approximately six to nine months before the end of recessions.

Meanwhile, an increasing number of mutual fund managers have become bearish about the future direction of stock prices and an increasing number of economists think the U.S. economy is now in a recession.

That’s also an important development because those so-called “experts” have historically been very bad at forecasting future economic and financial developments. More specifically, they tend to become bearish about the future direction of the economy and stock prices at about the same time that the economy is near a low point in the business cycle and stock prices have already experienced their biggest declines.

In fact, my experience indicates that most mutual fund managers tend to buy high and sell low, rather than buy low and sell high.

For example, last October (when I was advising subscribers to my newsletter to sell stocks short) most mutual fund managers were advising investors to invest in cyclical and growth stocks.

Many of those same portfolio managers are now advising investors to invest in so-called “defensive” sectors of the market — in sectors that tend to decline less than other sectors during economic downturns — and to avoid investments in cyclical and growth stocks. (By the way, approximately 85 percent of all mutual fund managers tend to underperform the S&P 500 Index in any given year).

Although I expect economic conditions both here and abroad to worsen over the next few months, my research indicates that the stocks of publicly traded companies can now be purchased at very favorable prices relative to the likely future earnings of those companies.

In other words, now is a time when investors can buy stocks near their lows.

Click here if you’d like to read more about my analysis of the financial markets and how to invest in those sectors of the market that offer the most favorable growth prospects during the months ahead.

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DavidFrazier
Those of you that regularly read my Moneynews.com commentaries know that I’ve become much more positive since mid-October about the future direction of stock prices. That outlook is based primarily on the following factors:(1) Numerous investor sentiment indicators suggest...
david,frazier,stocks
515
2008-28-17
 

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