The S&P 500 has finally broken out of its trading range to the upside, taking all major North American indices with it.
This was something I felt would happen at some point once the market gained some confidence. Why has the market finally mustered up enough strength to break out of a trading range it has been in since the spring? Is it a time to be more bullish? These are the questions investors will need answers to if they are going to put more money to work in the coming months.
One of the reasons I believe the market has moved significantly higher in the last month is that, in general, investors have come to the realization that unless a new severe negative event hits the economy, the North American equity markets have already factored in the slow-growth, jobless recovery we are experiencing.
The North American stock markets have built in an approximate two per cent growth number (GDP number), having have come to the realization that private sector jobs are growing, but at a very slow pace. The equity markets know the tough grind the economy has ahead of it and that is why the major North American indices have not gone anywhere for quite sometime. In my opinion, this has provided us with a sort of temporary bottom in the market to move higher from in the future.
Now, finally, the positives in this market are starting to be focused on, and there are a lot of them. Investors in the U.S. are seeing more tax cuts for the middle class and for small businesses, and President Barack Obama is working on a bill to help create jobs as well. We finally have clarity in bank reform not just in the U.S., but all over the world (we know how much the market despised uncertainty with the banks).
Banks now know what they need to keep as a reserve in case of another crisis in the future. We are seeing companies with lots of cash on their balance sheets that they are finally putting to work in the form of dividend increases and M&A (Mergers and Acquisitions) activity. We still have near record low interest rates in Canada and rock bottom rates in the U.S. Lastly, there is a mid-term election happening in the U.S. that may change the makeup of how the government looks going forward. Many analysts believe this change will be good for the stock market in general.
Therefore, with all the new positives being added to the already large list of positives that already existed, I think the market is starting to tell us that the investment environment for equities is looking good and that stocks in many sectors deserve to move higher based on a brighter future.
When the day comes where the United States begins to add what analysts would call a significant amount of jobs, watch out! I believe that will be the final spark to take us back to pre-recession highs.
As I have said many times, investors should never try and time the market. Thus, individuals should look to buy quality investments at all times that match their risk tolerance, objectives and time horizon. You want to own companies that are leaders in their industry, companies that are cheap based on their earnings and that share their growth with their investors in the form of a dividend. I believe this is the formula for success. With these points in my mind, I feel that investors should continue to add money to their portfolios to take advantage of the growth that lies ahead.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities.
