Several people have asked me what I think of the market for the rest of the year. Like most people my opinion varies from day to day, a victim of the daily headlines. However, when I read this article on the historical parallel to 1937, it cause me to at least focus enough to come up with a rough guess.
Here is the article here that may help us understand where the economy is going for the next several months.
Commodity prices have increased rapidly this year, leaving many to believe that inflation is around the corner. In 1937 the fed tightened the money supply which led to an economic slowdown. This time the fed says they won’t make the same mistake. However the fed has said they are going to end quantitative easing at the end of June. Since this would mean the fed would no longer be printing extra money to buy T Bills, this will have the impact of tightening the money supply which in theory would slow down the economy. Maybe the fed will continue to reinflate until housing appears to stabilize, however at this point there is no indication that they will reverse their decision to stop QE2 on 6/30/11.
So its going to be an interesting few months. At any rate here are my thoughts on the markets -keep in mind I dont know anything – just a casual observer – but then again I dont think the experts know much either…
Stocks – I am nervous here -but I usually am pessimistic – but if the economy does slow, and/or the fed tightens money supply, or the Euro situation worsens, or other world unrest happens, I cant think that would be great for stocks. The latest jobs reports look worse, and housing still hasnt hit bottom, and it sure looks like there is a tech bubble just waiting to burst. So I guess I think there is a greater risk the stock market will be down by the end of the year than up by the end of year.
Bonds – Rates are so low now, and with Quantitative easing ending, you would have to think that would cause interest rates to rise to get people to buy Tbills. So I would be nervous about buying any long term bonds, given the possibility of more attractive bonds being issued later in the year.
Commodities – Seems scary to buy gold or silver at these levels. I wonder if it would make sense to buy oil stocks at these levels, with the belief that oil is one commodity that demand seems to be outstripping supply. Another idea – maybe something like Timber or Timberland stocks – Wood products are still cheap.
Cash – its painful to hold cash in this environment when you are getting no return and losing 2-3% to inflation every year. But maybe it makes sense to park money here short term until bonds become more attractive or the stock market corrects.
Another thought might be low PE dividend stocks – Many low PE stocks are paying 3-4% dividends, and growing dividends each year. Hopefully if the market does drop, they would be impacted alot less than some of the high PE stocks.
So thats my opinion at this point – would love to hear any thoughts out there or other ideas.