Capital Market Perspective

I have listened recently to quite a few portfolio managers offer their views on the future as they discussed their Q2 performances:

There are a wide spectrum of opinions:

Most pessimistic:

That we are 10 years into a 20 year Bear Market, which should end in 2020.
Basically, this camp has drawn the parallels to the market recovery that occurred in the 1930's post crash.

Obviously there are many significant differences between then and now:

One of those has been the ability of corporations to make adjustments. Something that has stood out in this economic crisis has been the flexibility and quickness that has been demonstrated by Q2 earnings results.

Over 75% of S&P companies beat earnings estimates. Not on revenue increases, but on cost cutting measures. Getting lean and in a hurry has had a significant impact.

Productivity

Nonfarm business productivity rose 6.4% at an annual rate last quarter, the Labor Department said Tuesday. The biggest gain in output per hour worked since the third quarter of 2003 suggested companies have adjusted to the recession by slicing jobs and workers' hours. The data help explain why companies can post good earnings figures, having moved quickly to cut costs.

As the economy recovers and demand increases, profit margins should benefit.

There is reason to be optimistic:

Yesterday the US Federal Reserve adjusted it's outlook: "Information received since the Federal Open Market Committee met in June suggests that economic activity is levelling out."

They have decided on a gradual removal of the excess liquidity that they had originally provided to stabilize the markets when they were in crisis.

In the interim Investors have been getting anxious about the extremely low rates offered in short-term "safe havens" in t-bills, GIC's and money market funds and there is plenty of money still parked there.

As equity markets defy the negative prognostications and better economic conditions begin to appear in the monthly statistics, Investors who have been waiting (and who are anxious because they have missed a considerable rally since early march) will be forced back to the equity markets and this will likely push them higher.

Each corrective pull-back in the equity markets has brought significant buying, which has further buoyed equity markets to continue to rally.

How far?

In all likelihood, farther than most think, because as momentum builds, risk appetite increases and further drives prices higher and those anxious about missing a further rally will be finally convinced to re-enter.

Unfortunately, as the markets got emotionally panicked on the downside in February, they will get emotionally euphoric on the upside (barring any negative economic or political shocks).

There could be some considerable upside potential building because for the time being short-term interest rates are not going up, confidence is returning and Investors appetite for risk is increasing.

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Thinking Ahead of the Curve.