Economic reports released in late February showed that house prices continued to fall and that the cost of just about everything else –food, clothing and gasoline— rose. Correspondingly, consumer confidence dropped to its lowest level in almost five years. Such news puts the Federal Reserve policy makers in a bind. Do they risk fueling inflation by cutting interest rates to stimulate the economy or do they hold fast? As if to underscore the market’s ongoing unpredictability, stocks rebounded despite the tough economic news and the ensuing pressure on the Fed’s rate policy. Energy stocks, buoyed by oil prices that topped $100 per barrel again, and technology stocks were the catalyst for the upward trend.
If cause and effect in the market, or lack of it, has got you confused, you’re not alone. At a time when each new economic report creates sharp swings in market consensus and continued volatility, even the pros are struggling to figure out a winning game plan for the future. Though no one expects the outlook for energy or materials stocks to diminish any time soon, times like these often are ripe for a shift in leadership. Though there are sufficient opinions out there to support a host of different forecasts, here are some of the key points under discussion among leading commentators:
- Information technology companies are expected to continue to benefit from global efforts to boost productivity. Software companies are looking to European and Asian clients to keep demand for their products going strong.
- Other experts see bargains in health care stocks, especially those involved in making medical devices and in biotech companies.
- Because smaller entities (in general) will find credit harder to come by, some analysts are betting on the big stocks (equity in the big cap segment of the markets), and many are suggesting that investors should be looking at big-cap overseas stocks, too. Because the credit squeeze is expected to hurt smaller companies disproportionately, some analyst expect to see market sectors bifurcated (that is larger players will hold up much better than their smaller competitors).
- The weak dollar may help persuade American investors to look overseas for opportunities. Traditionally, most U.S. investors tend to keep their investment dollars stateside, but statistics paint a compelling reason to consider foreign securities. The Europe, Australasia and Far East Index compiled by Morgan Stanley Capital International (more commonly known as the MSCI EAFE), a stock market index of foreign stocks recognized as an important benchmark for overseas stocks, showed a return averaging 22 percent a year over the last five-year period –a return that is almost double that of the Standard & Poor’s (S&P) 500.
- For those who wish to adjust their portfolios to create a mix of domestic and international securities, experts recommend avoiding radical shifts. Instead, they suggest that investors discuss their specific needs with their professional advisors who can devise appropriate timetables and suggest solid performing international mutual funds.
Lest we all become immersed in worries, it is worth remembering that a rough start to the year doesn’t mean the months ahead will follow suit. The markets here and overseas will weather the U.S. sub prime mess just as they countered –within the last decade—the financial crises in the debt markets in Asia.