Investing in the 21st Century
2008 Stock Market Strategy
May 9, 2008
2008 has so far been a year of wild swings as the bulls and bears battle for control of the market. What’s going on, where is the market headed, and where should you be allocating your investments in uncertain times?
2008 has so far been a year of wild swings as the bulls and bears battle for control of the market. Despite a recent recovery, patience and caution are vital in this environment. What’s going on, where is the market headed, and where should you be allocating your investments in uncertain times?
In January, concerns over the fallout from subprime lending caused the investment community to panic about a global slowdown stemming from a credit crisis caused by risky mortgages given to unqualified borrowers. The declining real estate and financial sectors dragged the rest of the market down with them, and in March the Dow was down over 10% and the Nasdaq 19%.
Aggressive interest rate cuts from the Federal Reserve and moves to lend additional capital to ailing banks helped the market bottom out amidst a Fed-backed “take-under” of Bear Stearns (BSC) by JP Morgan (JPM).
Since mid-March the market has bounced back and the Dow is now down just 4% for the year and the Nasdaq 10% in the red. Despite the recent optimism and recovery, the market faces many challenges. Low interest rates and easy access to money has amplified inflation, causing the US dollar to fall 10% relative to the Euro in 2008 alone, propel oil prices over $125 a barrel, and cause gold to briefly eclipse $1,000 an ounce.
The good news recently has come in the form of better than expected corporate earnings and a few positive economic indicators. During the first quarter of 2008, US GDP increased at a 0.6% rate. Despite the pronounced slowdown to less than 1%, a recession is officially defined as two quarters of negative GDP growth, but we have yet to see even one. However, consumer confidence is languishing at 26 year lows as a weak job market combined with rising gas and food prices are taking their toll on consumers.
Against this challenging backdrop, there are some industries that are thriving. Commodities have continued to be a safe haven as robust demand from emerging economies continues to outstrip demand. There have been big moves in oil, natural gas, agriculture, steel, coal, and gold already, but the outlook remains very bullish. The valuations of many of these industries are also relatively cheaper than the rest of the market, with many trading at P/E ratios below 15. This type of valuation doesn’t constitute a bubble even with huge runs in stock prices.
Consumers are clearly cutting back on discretionary spending and sticking with what is important to them. Consumers drive the US economy and are notorious for spending more than they earn. At a time when consumers are pinched, it’s important to be exposed to what you can’t live without.
Another trick to protect your portfolio against inflation is to sweep any free cash into the StreetTracks Gold Trust (GLD) ETF, which holds actual gold bullion. Gold prices have retreated back to $885 an ounce after a meteoric run past $1000, but the precious metal still holds great value in times of uncertainty and volatility. In the age of worthless Subprime debt, you want to be holding hard assets.
Many analysts believe the worst of the Subprime mess is over now and the market is back on track to recapture all-time highs. In the near-term, the Dow is facing technical resistance from the overhead 200-day moving average at the 13,000 level. However, the 50-day moving average is lingering as a support level at 12,500 so the market could see a bounce soon. Additionally, the moving averages are coming close to making a bullish cross, where the 50-day moving average crosses above the longer-term 200-day.
By protecting your capital with gold bullion and maintaining an overweight exposure to commodities, your portfolio will be in good shape for benefiting from a resource constrained world.
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Subscribe to feedDisclosure: At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.