September brought no relief to anxious investors. In addition to ongoing concerns about terrorism and anxiety about global oil supply, investors also were faced with problems closer to home as hurricanes tore through the Gulf coast area threatening rigs and refineries. Profit warnings from Unilever and Colgate, two of the world’s largest consumer products companies, provided further evidence of economic slow-down; precipitating declines not only in their respective stock prices, but also in those of competitors including Procter & Gamble and other blue chips.
Under such conditions, investors are staying on the sidelines playing a wait-and-see game, and the market stays mired in a tight trading range. Throughout 2004, each time the Dow Jones moved above 10,500, the bears generated another retreat. Not surprisingly in such an environment, most personal investors have opted for the apparent safety of the sidelines. In doing so, they fail to position themselves for better times. Experienced market observers note that investors profit from staying in for the long haul; staying in the market requires investors to keep their emotions out of stock market investment decisions. Acknowledging that this is not an easy task, pundits note that most bull markets last longer than two or three years and reassure investors that sharp reversals very rarely happen overnight. They note that, although the economy is not as robust as it might be, it is still growing at a respectable rate-with 3.5 to 4.0 percent forecasted for the third and fourth quarters. Bullish analysts stress the importance of identifying factors that are blocking a rally, separating them into either long-term trends or short-term adverse conditions, and they urge investors to use objective criteria to build an appropriate strategy to capitalize on the better times ahead in 2005.
Shorter Term Issues
The bulls believe that investors should plan to take advantage of lessening uncertainty and note that some concerns will disappear or diminish over the next few months.
- Election Uncertainty
Many market observers-despite the obvious fact that their economic programs differ-believe the election of either presidential contender won’t have huge impact on market performance. Either way, election uncertainty will soon be over.
The dangers of terrorism will continue. But, barring a major incident on U.S. soil, expect a more measured acceptance of terrorism as an on-going risk, and for the market to adjust to the ongoing threat as a risk similar to other unpredictable events like floods, hurricanes, etc.
- Oil price hikes
Prices are being propelled upwards by fears that terrorism could disrupt worldwide production and uncertainty over stability of supplier nations like Russia. Price hikes are expected to diminish as the market adjusts to the ongoing risk of terrorism. We can expect today’s higher prices to spur more exploration and to make existing reserves commercially viable, leading to increased supply. With this in mind, some pundits suggest retaining a position in oil industry leaders but reducing exposure by eliminating those more prone to volatility, like oil service companies.
- Long-Term Interest Rate Increases
Most market analysts agree that investors would be wise to pay close attention to market consequences created by long-term interest rates increases. Upcoming forecasts for the economy range from fears of "stagflation" (a mixture of rising inflation and weak consumer demand) to hopes for a moderate recovery. Bears and bulls can find economic data to bolster either position. Whatever view proves correct, interest rates will provide the clues.
- Strong Balance Sheets
Rising interest rates suggest that cash-rich companies could represent attractive buying opportunities for investors. Many advisors are urging clients to focus on blue chip companies with strong balance sheets.
- Fast-Growing Niche Markets
Mid-sized companies with good niche markets often show growth rates that outstrip overall economic growth. Companies that continue to flourish despite bumpy economic times include firms targeting the rapidly expanding Hispanic market, and those who offer problem-solving solutions (financial services, specialized computer software, etc.) to hard-pressed businesses and individuals.
Solid research, objective analysis, prudence and patience will stand investors in good stead as the market negotiates its current doldrums. Uncertain times create opportunities for those who can see beyond today’s anxieties to better position their portfolio for 2005.