The pull-back that occurred in the markets during the third week of January had both pundits and individual investors wringing their hands. The first major sell-off of the year wiped out the year-to-date gains and prompted concern that the bull market run was over. Fears surfaced that Wall StreetÂÂÂ’s optimism got ahead of results when companies reporting good quarterly results saw little increase in their equity valuations.
As the dust settled at month's-end, more moderate views prevailed. Experts concluded that two issues were to blame for the plunge. The first issue concerned the Federal Reserve - specifically, doubts over Federal Reserve Chairman Ben BernankeÂÂÂ’s confirmation for another term. The second issue involved President ObamaÂÂÂ’s plans to split up big banks. Pundits feared the first issue would bring unwelcome instability to the economy, and the second issue raised fears of more government regulation in the financial sector. Analysts were reassured as the week progressed to find out that Bernanke had bipartisan support in the Senate and would likely secure his second term in office. However, questions remain concerning the outcome of President ObamaÂÂÂ’s efforts to reduce speculative risk-taking by large banks. The proposals Obama outlined are designed to prevent banks from potentially using federally insured deposits to indirectly support speculative trading. Large financial institutions such as Bank of America, Goldman Sachs and Wells Fargo would be affected by these measures. Pundits expect resistance from Senate Republicans to any moves to increase regulation.
Future Market Leaders
Despite dissent on these two issues, economists believe that economic trends continue to look good, though perhaps not as bright as the markets believed. Some think the recent sell-off occurred because many stocks already had good news priced in. Analysts believe the markets will continue to be more discriminating, and that good news will not necessarily lift all stocks higher.
Overall, many Wall Street commentators think the time has come to shift gears from high-risk investments - such as companies struggling to come back - to stronger, stable, corporate players. This is based on the theory that companies at the bottom of the barrel often are the first to show the most obvious signs of recovery. This makes them the darlings of the investment community - but only for a little while. When it comes to the long haul, conventional wisdom favors the tried and true. Pundits expect this recovery to be rocky, and under such circumstances their preferences shift toward larger companies with strong brand recognition and market presence. These are the corporations that might be expected to do well even if unemployment statistics fail to improve and the housing sector remains problematic.
How do investors find stable companies with the best potential for current conditions? Analysts look at a variety of statistics to determine which companies are making the best use of their resources to generate higher profits, including returns-on-equity, returns-on-capital and marketing data. These quality stocks might not generate the excitement of fast-track growth companies, but they do offer more security to investors in the event of a market slow-down.