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Wall Street up, but can it stay there?

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by Peter Switzer

The Yanks gave up a 170-point gain, went negative but finished in the black, which was not a bad effort considering they received another worse than expected economic reading. But the question the long-term investor has to ask is, 'How important is this short-term data to your strategy?'

And are there believable arguments that build the case that we’re in a correction phase, which will eventually give way to another rally?

I say yes and warn about being too sidetracked by Armageddon Anxiety.

Index lower, but services sector expanding

But before the good news or views, let’s put the spotlight on a slightly disappointing ISM Services report. The June Institute for Supply Management’s index of non-manufacturing businesses, dropped from 55.4 in May to 53.8. That’s not bad and any reading over 50 means the sector is expanding but economists expected a reading of 59!

This is a good economic indicator because it covers some 90 per cent of the US economy. This adds to a recent spate of softer readings of key indicators and the smart guys and gals aren’t looking at these figures and screaming “double dip” but are saying that US growth will peel back from around four per cent to three to 3.5 per cent growth. If that’s so then jobs can be created and the recovery will underpin better share prices.

Earnings ahead

Overnight both the Dow and S&P 500 put on more than 0.5 per cent taking the latter index off 10-month lows and I loved Bloomberg’s take on the positive day explaining that the market gain was on “speculation earnings growth will help equities rebound from their lowest valuations since the bull market began in 2009”.

The following assessment could be prophetic.

“Stocks are pretty oversold and pessimism is getting pretty fixed and that could inspire a short-term rally,” Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees more than $85 billion in client assets, told Bloomberg. “Second-quarter earnings are expected to be good.”

Right now, pessimism has pushed the index’s P/E to 12.5, which is on the low side on a historical basis and is a reasonable 'buy' sign.

On top of that the index is down around 16 per cent since late April and as Europe starts to look less of a big concern and China proves it’s not diving to lower than expected growth rates, shares could easily turn positive.

No Armageddon

This is another pearl from Bloomberg that I have to share with you: “The retreat came even as analysts raise earnings estimates for US companies at the fastest rate since at least 2004. Profit for S&P 500 companies will jump 34 per cent in 2010, compared with a projected gain of 27 per cent on 29 March, according to more than 8000 estimates compiled by Bloomberg.”

Interestingly, Alcoa kicks off the second quarter earnings season next week and it comes as metal prices have started to pick up. Next week could be the start of the turning point for shares or possibly it has already begun.

I think we are long way from Armageddon.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, July 07, 2010