Monday, October 31, 2011

Will This Be A Buy The Dip Type Market For Stocks?

October was certainly a good one for the U.S. equity markets in spite of the 276 point decline today. The Dow Jones Industrial Average increased more than 1,000 points in the month returning 9.5%. The S&P 500 Index increased 10.8% in the month and was the best return since December 1991. A 3-5% pullback certainly would not be surprising given the strength of the advance in October. Will investor then buy into this pullback? I believe they will. One key will likely be the ability of the market to find support around the 200 day moving average of 1,274.

From The Blog of HORAN Capital Advisors

From a fundamental perspective, valuations and earnings for companies in the S&P 500 Index in Q3 are coming in at a respectable level. Of the 315 companies that have reported results for Q3, 71% have reported earnings above analyst expectations and this is higher than the long term average. Importantly to, revenue growth has growth has exceeded expectations as well.

Almost two years ago, I wrote a post that focused on indicators investors might evaluate to determine the future direction of the economy. Following is an update on several of those indicators and they do suggest the economy is not going to dip into another recession.

Durable Goods Orders
  • a positive trend continues in durable goods orders since the recession end in 2009.
From The Blog of HORAN Capital Advisors

Jobless Claims
  • jobless claims remain stuck above 400,000; however, they are trending lower. This is indicative of of a slow growth economy. The initial report for Q3 GDP was growth at 2.5%.
From The Blog of HORAN Capital Advisors

Retail Sales
  • strength in retail sales continues to surprise on the upside.
From The Blog of HORAN Capital Advisors

Chicago PMI
  • the Chicago ISM-Purchasing Managers Index came in below expectations today; however, the reading remains above 50 indicating an expansionary environment.
From The Blog of HORAN Capital Advisors

Consumer Confidence
  • an area of concern is the confidence level of consumers and businesses. The lack of business confidence was highlighted in the Chicago Purchasing Managers release today. Businesses have concerns above the strength of the economy going into 2012. As the below chart shows, consumer confidence (blue line) is trending lower as well. This lack of confidence on the part of both businesses and consumers will likely constrain economic growth and result in a slow growth environment through the election in 2012.
From The Blog of HORAN Capital Advisors

Looking to the end of the year, volatility will likely be the norm. Washington, D.C.'s so-called Gang of 12 needs to come up with a "credible" deficit reduction plan. With the U.S. dealing with its debt issues along with the EU's sovereign debt issues, the cure for dealing with over leverage will likely be slower economic growth, but growth nonetheless. These issues alone will influence market action in the short term. Company fundamentals though look to be good and fundamentals tend to drive long term investment returns.

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