Tags: market | GDP | earnings | Q1

Don't Fear the Market Dips, Buy Them

By    |   Thursday, 02 April 2015 08:28 AM

There are powerful forces exerting both upward and downward pressure on stock prices. As a result, we have seen a first quarter where the market has gone nowhere in a hurry.

The S&P 500 is about flat for the first three months of the year. Yet stock market volatility has been higher than it has been in years. The CBOE Volatility Index (VIX), which is a benchmark measure of market volatility, has averaged substantially higher in 2015 than it has since 2011.

It has been a tug of war between good and bad news for stocks. On the positive side, money still has no place else to go to earn a decent return. Bonds aren't cutting it while interest rates throughout the world are near record lows. Cash has been the worst-performing asset class in the past 10 years, a period that included two wars and a financial crisis. Stocks are the only game in town and will continue to be for some time.

But the market is facing down some problems right now.

First-quarter earnings and GDP are likely to be very poor, as a lot of things are weighing down the economy and the market at the same time. The energy sector is enduring bad times in lieu of the oil price crash and the sector's earnings, which account for more than 10 percent of the S&P 500, promise to be disastrous. The strong dollar, which has soared more than 20 percent in a short amount of time, is wreaking havoc with earnings of companies that export or generate revenue in overseas currencies.

The colder-than-normal winter in much of the country, as well as the West Coast port strike, will also contribute to a bad first-quarter GDP.

But bad earnings are a big problem. Earnings are the primary justification for higher stock prices, especially without the Federal Reserve's stimulus. In fact, earnings need to be reasonably strong to justify current prices.

The bad first quarter will likely spook the market as an uglier narrative for the state of the economy reverberates. At the same time, when you look at the Middle East and Europe, it appears that the world is going to hell in a hand basket. A crisis could erupt at any time. Such uncertainty makes the market very risky in the near term.

I think the bad news might well win the tug of war in the months ahead. A 10 percent or more correction in the market in the next quarter or two is becoming increasingly likely. But that should present an opportunity.

Benefits from low oil prices and a strong dollar should excel in the second half of the year as the cost side of the equation is reduced for companies. As well, the global economy is already showing signs of picking up. An improving global situation would be a big tailwind for the U.S. economy.

And then there is the consumer. Low gas prices, rising wages and more confidence should make consumers a powerful upward force in the economy for the rest of the year.

The market might sell off. But improving earnings should drive prices back up. Money that leaves the market will wind up like a little kid who runs away from home, and quickly finds out that there really aren't any other good options.

The market might end up posting meager returns for the year. But buying into a weak market should be great way to boost your returns. Don't fear a down market, exploit it.

About the Author: Tom Hutchinson
Tom Hutchinson is a member of the Newsmax Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.

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There are powerful forces exerting both upward and downward pressure on stock prices. As a result, we have seen a first quarter where the market has gone nowhere in a hurry.
market, GDP, earnings, Q1
Thursday, 02 April 2015 08:28 AM
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