Is now the time for the growth trade?

Your Investments: Analysts who call for continued market gains are dismissed as stock pumpers with some kind of hidden agenda.

By AARON KATSMAN
I know that being an optimist isn’t nearly as popular as being a pessimist when it comes to stock-market prognosticating. After all, it’s more exciting to read about the coming economic catastrophe that will send the global economy into an inescapable black hole than to read about continued stock-market gains.
Pundits spewing negativity become famous for predicting a 20- percent market pullback correctly; accurate or not, their future predictions are taken as gospel. Analysts who call for continued market gains are dismissed as stock pumpers with some kind of hidden agenda.
The “sky is falling” crowd, of course, has no hidden agenda; they are making these predictions out of a duty to save society. Not! Well, I’m sorry to bore some of you, but here come a few reasons to be optimistic for 2011, and it’s important for your investment portfolios to be positioned to take advantage of potential continued market appreciation.
Fear mongers are pointing to surging bond rates as indicative that continued governmental printing of money and eventual inflation will lead to higher interest rates.
Over the last month, rates on long-term US government bonds have risen about 100 basis points to more than 3.5%. But maybe there is something else at play here that the pessimists are conveniently omitting from their economic analysis? While slower than many would like, the US and global economies are actually improving. We have recently received a slew of encouraging economic data attesting to that. Strong improvement in the retail sector was reported in November, with retail sales up for a fifth-straight month. All indications are that the recent Christmas shopping season was strong.
Manufacturing from the industrial- production report is up five consecutive months, and the production of business equipment (capital expenditures) rose 12.5% over the past year. To top it all off, economists are predicting 4% growth for the fourth quarter.
CONTINUED TAX CUTS
While there are some who criticize the recent US tax deal, low personal income-tax rates were extended for another two years, and new incentives to encourage business investment could set the stage for a surge in economic activity and new hiring. With an economic policy that has basically been a non-stop, two-year assault on business – with all kinds of added regulations and a general antibusiness attitude coming from the Obama administration – businesses were waiting for a positive signal before embarking on new hiring and new investment.
The recent Republican landslide win in the congressional elections was the green light businesses needed. Corporations have succeeded in significantly cutting expenses and are now very lean.
Not only are they more agile and able to quickly adapt to changes in the marketplace, but when the overall economy starts improving, they are poised to post very strong profit growth. That should be good for their potential stock appreciation.
THIRD YEAR OF PRESIDENCY
There has been some really interesting analysis of both economic and stock-market performance during the various years of a presidential term. According to The New York Times: “The American economy and the American stock market tend to do much better when a president’s term is nearing an end than they do when the term is beginning. If that pattern continues, the news from both Wall Street and Main Street may get better over the next two years. For the stock market, the sweet spot is usually the third year of a presidential term, which is 2011 for the Obama administration. The stock market often leads the economy, and that seems to be the case in presidential cycles. The fourth year, on average, has seen the most economic growth.”
Since the end of World War II, 62% of US economic growth came in the final half of a presidential term. The Times article continues: “The stock market pattern was even more marked. An investor who owned stocks during the third years of terms, and stayed out of the market during the other years, would have earned profits more than twice as great as those that went to an investor following the opposite strategy, owning stocks in all but the third years.”
Sure, there are still some serious economic issues to deal with. But it seems like the economy has turned the corner, and it may mean that you should take another look at your portfolio to potentially profit from the improving outlook.
aaron@lighthousecapital.co.il
Aaron Katsman, a licensed financial adviser in Israel and the United States, helps people with US investment accounts.