"Markets have gone up too much, too soon, too fast."
-- Nouriel Roubini
Professor 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 nearly 70%, and the S&P 500 has jumped 62%. Healthy companies like Amazon.com
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 may be 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. Also, as 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. Just a month ago, the Fed surprised banks by raising the rates on short-term loans. Would investors really be throwing their money into unproven dividend stocks like Windstream Corp.
(NYSE: WIN)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 Intuitive Surgical
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 companies like US Bancorp
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During a time when many companies were beaten down or slashing dividends, Clorox kept trucking along, paying a hefty 3.10% dividend and not missing a beat. It's managed to raise its dividend every year for the past 32 years, and raised it another 9% this past June. With a forward price-to-earnings ratio of 14 and a significant history of success, Clorox seems like a great value stock.
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This article was originally published Nov. 5, 2009. It has been updated.
Fool contributor Jordan DiPietro doesn't own shares of any of the companies mentioned above. Ebix, Green Mountain Coffee Roasters, and Intuitive Surgical are Motley Fool Rule Breakers selections. Amazon.com is a Motley Fool Stock Advisor pick. Clorox is a Motley Fool Income Investor pick. The Fool owns shares of Ebix. The Fool's disclosure policy is trading dirt cheap.
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