"Markets have gone up too much, too soon, too fast." -- Nouriel Roubini
Prof. Roubini, known for having predicted the economic crisis, proclaims he's cautious in the near term because of a weak economic recovery. George Magnus, economic advisor at UBS, agrees, saying, "This recovery is entirely dependent on the unprecedented largesse of governments and central banks ... the recovery is built on very short-term foundations."
This doubt about the economy is all well and good, but one only needs to look at the recent stock market recovery to find some seriously optimistic expectations.
We must be dreaming
Since the March lows, the MSCI World Index (ACWI) has climbed by 73%, and the S&P 500 has jumped 62%. Healthy companies like Caterpillar
There goes the alarm
The short answer is no -- this can't be as prompt a recovery as some believe. Here are three reasons why I believe this rally is a castle made of sand:
- Deleveraging: Household balance sheets are fundamentally linked to property busts, which often take years to play out. People will continue to spend less and consume less as they realize the reduced worth of their assets. This is the ultimate hurdle as the economy struggles to grow, since consumer spending accounted for 70% of the economy in recent years.
- Government spending: Unfortunately, it seems as though our tax dollars have been behind much of the rally. Bears point to the fact that car sales slowed after the Cash for Clunkers program ended, and home sales will probably become sluggish when the first-time buyer tax credit extension expires next year. Also, as the threat of inflation increases, and the public becomes more concerned with the ballooning of the Fed's balance sheet, government spending will slow. Magnus states, "If you don't have credit growth operating, it is hard to sustain spending while unemployment is still rising." In other words: Let's not count on the government to get us out of this mess.
Interest rates: Central banks worldwide have kept interest rates as close to zero as possible, which has increased the flow of capital into the stock market. But many people believe low interest rates (cheap money) are one of the reasons we got into this fix and think the Fed will have to raise rates sooner than later. Would investors really be throwing their money into inconsistent and risky dividend stocks like Cherokee
(NASDAQ:CHKE)if they could earn 5% or 6% with CDs like they could in 2006 and 2007?
This is no time to snooze
OK, so what can you do?
You can look for growth stocks, companies like Evergreen Solar
You can try to play it safe and look for dividend-paying stocks that have some possibility of appreciating in price. However, even steadfast, previously reliable stocks like Diageo
The smart move is to follow in the footsteps of investing gurus like Benjamin Graham, Warren Buffett, and David Dodd. In any environment, good or bad, there will always be undervalued stocks -- the tricky part is finding them. Our analysts at Motley Fool Inside Value are constantly finding great companies that are selling below their true value. These companies are operating profitably, are trading cheaply, and have responsible and reliable management. In fact, many exhibit strong growth and pay a dividend -- so we can have the best of both worlds.
A few months ago our team recommended Sysco
During a time when companies are strapped for cash, Sysco consistently generates over $1 billion in free cash flow. Its margins are small -- but it has such massive economies of scale that it is able to manage its capital well and return money to shareholders. With 16% market share, the company has operating profits shockingly above the competition -- five times better than its closest competitor, and 21 times its No. 2 competitor. Trading for a 15 price-to-earnings multiple and a having a gigantic economic moat, Sysco seems like a great value stocks.
I can't lie -- in these uncertain times, our team has picked a few stocks that haven't turned out as we would have liked. But since inception in 2004, our picks have returned more than seven percentage points over the S&P 500, and we continue to work hard to bring you only the best of the best. Our analysts not only provide you with their recommendations, but they also tell you at what price to buy and at what price a stock is no longer a bargain.
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Fool contributor Jordan DiPietro doesn't own shares of any of the stocks mentioned above. Sysco is a Motley Fool Inside Value choice. Diageo and Sysco are Motley Fool Income Investor picks. The Fool owns shares of Sysco.The Fool's disclosure policy is trading dirt cheap.