Scared of the debt crisis in Europe, a potential slowdown of Chinese growth, stubborn unemployment numbers? I don't blame you.
In September, consumer confidence marked a multi-month low, as investors pulled billions of dollars out of equities. Individual investors like you and I were too fearful to put any money in the market.
The good news? It's only two months later, and we're back, baby. And I've got two stocks I think are great buys right now – including one that I even purchased for the portfolio that I manage.
Are we really back?
I certainly don't have a crystal ball, but I can tell you what the numbers say.
- The S&P 500 has surged by 17% since late August, officially reaching its levels from the pre-Lehman collapse days.
- The American Association of Individual Investors states that 48% of investors are bullish on stocks (as of last week) -- the highest level since February 2007. Bearish sentiment is at its lowest point since January 2006.
- In August of this year, investors pulled $23 billion from U.S. equity funds. Since early September, about $8.4 billion has been poured back into those same funds, drastically changing the direction of fund flows.
Institutions aren't the only big buyers. Out of that $8.4 billion, about $2 billion (or 25%) came from retail investors. Of course, investor optimism can signal a frothy market, and there's no doubt that there are plenty of concerns and reasons to be cautious in our outlook. Still, the news suggests that now may be as good a time as any to make sure you've got money invested.
Finally, some good news
Some random event isn't causing investors to suddenly become bullish. This is no amazing and satisfactory fluke (like the Dallas Cowboys starting their season 1-7). There's good reason for all our optimism!
First, it doesn't really hurt that the Fed is willing to pump some $600 billion into the bond market in an attempt to jump-start our sluggish and wavering recovery. It also doesn't hurt that Bernanke and company plan on keeping the federal funds rate at historic lows for "an extended period." Say what you will about quantitative easing, but so far, the news hasn't hampered the recent market surge.
Second, and more importantly, the third quarter has been an absolute blowout. In the month of October, 198 companies raised their profit estimates above analyst projections, whereas only 130 cut them. This is the biggest gap since Bloomberg began keeping track in 1999.
Try this out for some context. Over the past 10 years, the average ratio of companies whose earnings beat forecasts compared to those who lagged them has been 0.59. In October, that number reached a shocking 1.5! Companies have been able to cut costs, improve productivity, and streamline operations -- and it's having a massive impact on the bottom line.
For instance, Ford
And despite perceived weakness in global demand, industrial and material companies like Caterpillar
Steel prices have taken a hit, and the industry is still in uncertain territory -- U.S. Steel
No wonder investors like us are excited --the market is finally moving!
While you shouldn't run blindly in the streets, scooping up shares of any old company, it's important to make sure you get in the game.
Take two for the road
Just because it's a bull market doesn't mean every stock will rise; after all, in a bear market, not every stock goes down. In your quest to choose wisely, let me offer two stocks to consider.
First up is Nucor
Second is Activision Blizzard
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