THE STOCK MARKET IS UNDERVALUED. I said back in January, 2010 that the stock market was overvalued unless American jobs were created. Since the great recession began, companies slashed payrolls, became more efficient, and earnings have been better than expected if not robust. The slashing of jobs has slowed or stopped at most companies, and some jobs have returned. Though governmental lay-offs loom as municipalities struggle to meet their budgets, positive things are on the horizon. As earnings season kicks off once again with Alcoa (AA) on July 11, 2010, I anticipate good earnings numbers (although Alcoa may disappoint).
Stock values are too low because of F-E-A-R. I’m not saying that people should not be cautious in light of all of the negativity in capital markets, but it’s easy to side with the bears in the midst of so much negative market hysteria.
Over a Trillion dollars sits on the sidelines: It’s wrong to believe the financial newscasts and articles about cash on the sidelines that will flow into the market in mass, and drive stick prices quickly higher. The fact of the matter is that much of this cash on the sidelines is not liquid, i.e. invested in short and intermediate-term treasuries, which will require time to unwind and deploy into the market.
Confidence is the key. When institutional investors, money managers, hedge funds, pension funds and individuals get confident that the economy is moving forward, I see a big move higher over a 6-24 month time frame. The balance of the dollars on the sideline will not become liquid and enter the market until some confidence has been sustained, at this point the mass of the sideline money will give the market an extra boost to the upside.
There are a host of companies trading at long-time lows in terms of their earnings. For instance, Bank of America and GE normally trade at 15 times earnings, now they’re at 10. Likewise, Exxon mobile historically trades at 15 times earnings, and is now at 5 times earnings. Despite all of the negativity surrounding BP and oil companies in general, Exxon will still produce great earnings and should see a jump in stock price when confidence returns to the market. It doesn’t take a rocket scientist to tell you that the market will move higher when confidence returns.
Also, let’s not forget the “Presidential Cycle:” the stock market typically goes up during the last two years of a presidential administration.