Equity prices had a very good week. Don't get carried away, however. The rally in the stock market demonstrates that investors are capable of anticipating the better times that lie ahead, which is entirely appropriate. Still, the economic turn will be a slow slog. Credit markets will require some time to revert to normal. The economy will also require time before it starts producing net job growth on a regular basis. Therefore, we should expect the market to remain somewhat choppy, with an upward bias, until the economy clearly starts to show signs of improvement sometime later this year.
There's much talk about a "bear market rally," which means that some observers believe the rally is just ephemeral and the prior decline in stock prices should resume. We disagree. The Fed's creative policy actions introduced liquidity to a financial system that was bereft of buyers of debt, because investors couldnt determine if they'd be able to sell anything they bought. The entire credit market was seizing up. The Fed's actions restarted activity in these markets. Trading is not back to normal yet, but the improvement is unmistakable. Moreover, the improvement is attracting more capital from aggressive investors who are anxious to take advantage of depressed market prices. As a result, those prices will not remain depressed for very long. Financial firms have been able to raise vast sums, running into the tens of billions each week to shore up their capital base. The healing process is well underway.
As the financial markets improve, investors are increasingly willing to assume some risk. Credit spreads are narrowing once again. Stocks, the ultimate risk investment in the long-term health of the economy, are also recovering. In fact, Main Street managed through this turmoil impressively, with corporate earnings performing significantly better than expected. Financial companies still need to report that their asset values are stabilizing. And some financial firms remain in very weak condition and their fate is yet to be determined. Some of these firms may yet fail, if they cant find someone to provide the capital they lack. Still, the worst appears over.
So, investors should be searching for the investments that will participate in the economic rebound, as it unfolds. Some financials and retailers will gain market share from those companies that have failed or been severely weakened and will emerge even stronger. Focus on the strongest and those with special niches that should do well in an improving economic environment. Download this article in PDF Format
About Advisors Capital Management, LLC
Advisors Capital Management, LLC (ACM) is a provider of managed portfolios and financial services for industry professionals and their clients. As investment strategist, Dr. Lieberman oversees the company's "Portfolio Partners" investment program. Additionally, he provides guidance to the ACM Wealth Coordinators who integrate the work of financial advisors, financial planning, tax, estate and portfolio management professionals to build, protect, and maintain clients' wealth. Although the information included in this report has been obtained from sources Advisors Capital Management, LLC believes to be reliable; we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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