Sunday, July 26, 2009

Stealth Rally

From the Desk of Joe Rollins

This week proved to be another excellent one for investors. We are now seeing a great deal of investors who are trying to get invested before the market gets too high. I must’ve heard a hundred times in the recent financial news that too many investors have missed this rally, so now people are trying to get on the train before it leaves the station. Many of our clients listened to our suggestions and allowed us to get them comfortably seated on that train as the year has progressed.

For this week alone, each of the major market indices is up about 4%. Given the overwhelmingly negative news provided by the media, who would’ve thought that the major market indices would be up so positively in this week alone? For the year thus far, the Dow Jones Industrial Average is up 5.65%, the NASDAQ Composite is up 24.66%, and the S&P 500 is up 10.02%. If the financial year came to a close right now this would represent excellent returns for 2009, but we still have a little less than half a year to go.

Most of the gains we are enjoying at the current time are not due to the financial results of the companies being all that extraordinary. While it’s true that every major company has beaten their anticipated financial results, it’s also true that for the first time in a long time, companies actually have visibility into the future. However, do not lose sight of the fact that earnings are still dismal as compared to normal earnings in prior years.

I have often written that the stock market did not need for the economy to get better before starting to improve. The stock market is only interested in seeing the economy quit going down before it begins improving. At the current time, the economy seems to have stabilized, and virtually all economists are forecasting better days to come. By the year 2010, the United States’ annualized GDP growth rate should return to normal levels.

There’s a great deal of chagrin by the financial press that many of the largest U.S. companies are making their anticipated earnings for this quarter, but are failing when it comes to their gross revenues. The analysts seem to be uncomfortable with a company making its profitability numbers by cutting costs without having the anticipated revenues due to the recession. This attitude is simply not supported by the facts.

Corporations anticipated a downturn and dramatically reduced their costs. This has allowed them to make their projected profits at the disappointment (and in some cases, unemployment) of many of their employees. U.S. corporations are now “lean and mean” and are ready for improved gross revenues. If the corporations in this quarter are doing so well on lower than anticipated gross revenues, can you even imagine what types of profits they will realize with these reduced costs and normalized gross revenues? I think we should expect significantly higher profits in 2010.

I know that my readers get tired of me telling them it’s a good time to invest. I have been saying that fairly consistently since the beginning of 2009. Given the excellent returns that we have enjoyed so far for 2009, and with a reasonable expectation of better returns in the future, you can see why I continue to encourage you to invest in your future. While I cannot promise that your investments will do nothing but go straight upward from here, I do believe that over the next decade, you will have above average rates of return, especially in light of last year’s negative results.

At the risk of sounding like a broken record, if you have not made your IRA investment for 2009 or contributed to your child’s 529 plan, now is an excellent time to do so.