Pause For Thought
When the daily vagaries of the stock market leave the pros reeling, don’t be dismayed if the recent seesawing, nay-saying, and dire predictions have your head spinning. You are not alone. The market pullback at the end of May has the bears forecasting recession and all manner of dire consequences. Is the "sky falling?" Seasoned Wall Street commentators suggest it is not. As with all market cycles, orderly corrections are to be expected and - rather than feared - viewed as an opportunity to pause, review and rebalance. Is the glass half-full or half empty? Here are a few factors to consider:
Debunking The Chicken Little Scenario
The pessimists cite a litany of dire indicators: rising interest rates, rising inflation, declining dollar and a soaring trade deficit. To be sure, these all deserve attention and vigilance, but the gloom and doom forecasters who see a parallel with the crash of 1987 are over-looking some key differences. Currently most commentators believe that stock valuations are in line with fundamentals - that stock prices have grown in value in proportion to corporate earnings. This is markedly different from the situation prior to the 1987 meltdown, when stock prices soared to astronomical levels - way above earnings that were respectable but not supportive of such a steep climb. Bond prices have not followed the catastrophic pattern of 1987 either. To be sure, prices have gained this year, but the 10-year Treasury yield is still only 5 percent. We don’t see the same critical factors in play in the bond market that might precipitate a stock market crash.
Opportunities in Blue Chips
Some analysts do believe that the bull market is past its prime, but others look past soaring oil and gold prices to potential growth for blue-chip growth stocks. They expect the tidal wave that has pushed some commodities so high will eventually lift other less speculative sectors to attain more modest gains. These bullish commentators believe the overall economic outlook is sound and that inflation is under control. They forecast that Bernanke will not push rates much higher. In this scenario, they believe that blue-chip stocks with solid earnings growth are most likely to benefit as investors look for quality investment opportunities.
Pause and Rebalance
No matter how you choose to label the recent market pullback, this may be a good time to review and - if needed - rebalance your portfolio. Look at your asset allocations and your allocation goals. If circumstances have increased your exposure (or risk) in certain sectors, it may be time to sit down with your investment advisor and tax professional to review the composition of your holdings. Perhaps it’s time to look at some stocks that may be about to come into their own, or perhaps its time to rebalance domestic versus international holdings. Of course, any rebalancing strategies must be tailored to each investor’s needs and situation, but many analysts continue to see opportunities in major financial institutions, and in companies that provide goods and services to aging baby boomers.