Thursday, April 21, 2011

Widespread Complacency, Yet a Sense of Unease

Investors decide, from numerous potential factors that might affect markets, what matters to them at the moment.  They might be concerned about geopolitics.  They might be concerned about potential inflationary consequences of central-bank policies.  They might be concerned about a potential scarcity of oil at anywhere close to current prices, and consequences of high inflation and sluggish economic growth.  Or they might decide to set such concerns aside and focus on positive company earnings, and buy stocks.

That seems to be happening now.  Corporate earnings are again impressively strong, which would make this the seventh consecutive quarter of stronger-then-expected earnings.  In recent days technology companies (Apple, IBM, Intel, et al.), Verizon, G.E., McDonald’s, and Johnson & Johnson among others reported solid gains in profits.  (The banking sector is a notable exception despite relying on huge reductions in loan-loss reserves to boost earnings.)  The ability of large multinational companies to continue to produce such growth is why I’ve thought they are the most attractive part of the market (instead of small-capitalization stocks).

As stock prices climb despite various big-picture issues, it is easy to be complacent.  Yet, I have a nagging sense that the second half of the year will be rougher for markets.  I don’t know whether stock markets are topping here or are poised for another (final?) leg up before a major decline.  The S & P 500 Index, e.g, is bumping against resistance for the third time since February (though the Dow Jones Industrials have broken out to a new high).  Foreign stocks (EAFE Index) also are at a major resistance level.  Copper and agricultural commodities (Rogers Index) topped out in February.

This leaves me confused.  So it might be a good time to withdraw a bit from markets and wait for better values in stocks or corrections in precious metals and commodity markets.  I just can’t shake the sense that something significant—and unexpectedly disruptive—is ahead.

Steve Lehman

S & P 500:  1336
Russell 2000:  844

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