One of the first headlines that jumped out at me yesterday screamed "Stocks higher? Famed investor says don't bet on it." The famed investor was PIMCO's CEO Mohamed El-Erian and the prediction was that the S&P 500 index would drop 10% over a three- or four-week period, bringing it under 1,000 (though he's not predicting exactly when).
Ouch, right?
El-Erian isn't the only expert that has a pessimistic view of the market these days. But there are also plenty of folks out there that have a view quite different from El-Erian's. Earlier this month, for example, the chief equity strategist at JPMorgan Chase
In fact, read enough coverage of the stock market on any given day and you can find pretty much any and every opinion that you could dream up. Try to reconcile all the chaos and apply it to your portfolio and your head's likely to explode like a Gallagher watermelon.
It's for this reason that I've taken to asking a green stuffed pig that I made in seventh-grade home economics class for all of my stock market predictions. Unfortunately, my magic pig says that stocks are about to go down. But before I tell you why, let's take a look at why the others could be right.
The pessimist case
El-Erian and fellow PIMCO heavyweight Bill Gross have been warning about the stock market for a while. El-Erian is predicting that unemployment will stay above 8% a year from now and that for years to come the U.S. economy will grow at a sluggish 2% rate.
The stock market, he believes, has been on a sugar high, as investors sent the S&P 500 index soaring more than 60% from its March bottom. He claims that investors have been running toward stocks because they've been discouraged by the low yields from safe securities like Treasuries. Investors' "forced marriage" to stocks could end quickly and badly the minute the market starts to slip.
The optimist case
Optimists like the folks at JPMorgan, on the other hand, cite a multitude of factors that they think will add up to a healthy stock market through 2010. That list includes the suspicion that investors have remained too pessimistic about the potential for the economy to post significant growth over the next few years.
Stock market bulls also point toward the ridiculously low target rate that the Federal Reserve is continuing to hold. It's hoped that the rates will help fuel the economy, but at the same time they make many nonequity investments much less attractive for investors.
And while many commentators are still burying the American consumer, others claim there is pent-up consumer demand that will act like dry tinder for the economy in coming years. While this could benefit the overall economy, it would be particularly great news for companies like Starbucks
What the pig thinks
But as I said at the beginning, I'm listening to my stuffed pig these days when it comes to stock market forecasting -- and my pig says that the stock market is going down. Why is my porky friend so pessimistic? Because I flipped a coin and it came up tails.
Luckily, I put little weight on market forecasts when I'm investing, so whether it's coming from Bill Gross, Goldman Sach's Jan Hatzius -- who predicts 2.4% U.S. GDP growth next year -- or my green stuffed pig, I continue to do pretty much the same thing I always do. That is, I look for high-quality companies that are leaders in their industry, are well-managed, have enviable financials, and have stocks that are trading at reasonable prices.
So while my pig may scoff, I'm continuing to scout out stocks in today's market. And though it's tougher to find good bargains today than it was earlier this year, solid opportunities still exist:
|
Company |
Return on Equity |
Debt-to-Equity |
Forward Price-to-Earnings Ratio |
|---|---|---|---|
|
Johnson & Johnson |
27% |
23% |
13.6 |
|
Chevron |
14% |
12% |
10.3 |
|
Gilead Sciences |
49% |
24% |
13.6 |
|
Accenture |
64% |
0% |
14.9 |
|
Raytheon |
17% |
24% |
10.8 |
Source: Capital IQ, a Standard & Poor's company.
So go ahead, read the forecasts and, if you like, toss your market prediction into the mix. But do your portfolio a favor and make your investing more about buying shares of great companies and less about polishing the crystal ball.
Warren Buffett may be a great investor, but he can't buy many of the great stocks that we can.
