Ever since the financial system was on the brink of complete collapse four years ago, it's been a tough slog. But the stock market is a forward-looking indicator, and it knows that things are bouncing back.
This article published with permission from InvestmentU.com.
Ever since the financial system was on the brink of complete collapse four years ago, it’s been a tough slog. But that shouldn’t be unexpected. This was no ordinary recession.
When someone recovers from the flu, it takes a week or two before they’re feeling 100%. On the other hand if someone was in intensive care with double pneumonia, it’s going to be quite a while before they’re feeling back to themselves.
Well, in 2008 and early 2009, not only was the U.S. economy in intensive care with double pneumonia, but Presidents Bush and Obama, along with former Treasury Secretary Hank Paulson, had to break out the defibrillator a few times to revive the patient. The recuperation process was going to be long.
But now the patient is home, up and moving around again and on the road to recovery. There’s still a long way to go, but make no mistake about it — things are improving:
• In August, building permits were up 6.8% from last year.
• Employers added 163,000 jobs in July, higher than the 73,000 average from April to June.
• Timber company Wyerhauser (NYSE: WY), whose revenue is 84% tied to housing, saw second quarter revenue higher than it has been in several years.
• More employees are going on strike. According to Barron’s, RBC Global Asset Management noted that there have been 17 incidences of walkouts with 1,000 or more employees — the highest since 2004-2005. That’s a sign of confidence on the part of labor.
Following the smart money
In South Florida, one of the hardest hit areas by the popping of the real estate bubble, there are so many new construction projects in my small town, it’s hard to keep track.
Brand new buildings are going up to house restaurants including McDonald’s (NYSE: MCD) and YUM! Brands’ (NYSE: YUM) Taco Bell. Toys “R” Us is expanding its store. New strip malls are being constructed when just two years ago, existing ones were vacant.
Housing prices in South Florida rose 2.8% in July, the eighth consecutive monthly increase. This is a market where a year ago, you couldn’t give a house away.
And in some parts of Northern California, housing is back to the fervor experienced during the dot-com days. A realtor told me of a friend who bid on a house only to be one of 25 people making an offer. Another worked with a client on a condo that received seven offers and went for 9% above the asking price. She now has a client bidding more than 12% above what the seller is asking for.
Last week, I talked about following the smart money. If anyone qualifies as smart money, it’s the management of companies like McDonald’s, YUM! Brands and Wyerhauser.
Intel (Nasdaq: INTC), the world’s largest semiconductor maker is investing $300 million into a new facility in Chandler, Ariz. General Motors (NYSE: GM) will spend $220 million at two factories in Ohio. In October, Tanger Factory Outlet (NYSE: SKT) and Simon Property Group (NYSE: SPG) will jointly open a 350,000 square foot retail center in Texas.
Surprise! Stocks are up 20% this year…
Things obviously aren’t all lollipops and rainbows. There are still way too many people who need work and are struggling. We continue to have real problems that need to be tackled. But economies are cyclical and do bounce back, even after the extreme conditions of a few years ago — and that’s what we’re starting to experience now.
The markets know this. The stock market is a forward-looking indicator. It’s likely why stocks have gained over 12% year to date and 20% in the past year.
If the 20% gains of the market over the past year were for a full calendar year, it would be the 22nd best performance in the past 84 years. The good news is 20% gains in the market has been a good indication of future economic growth.
Let’s take a look at the five markets closest to the past year’s performance.
• In 1967, the stock market rose 20.02%. The following year, GDP rose by 4.8%.
• In 2009 and 1963, the market climbed 19.67% each year. GDP grew 3.2% in 2010 and 5.2% in 1964.
• In 1999, the market grew by 19.64% resulting in a 2.9% increase in GDP.
• In 1996, the market rose by 19.33% and GDP was higher by 4.4% just 12 months later.
After so many years of suffering, it may be difficult to picture brighter days ahead, but rest assured, they’re coming. That’s not me being my usual cheerful self. That’s the numbers and executives of some of America’s top companies talking.
After a near death experience, the patient is about to go back to work. Before you know it, he’ll be back at the gym and on the golf course. Let’s stop treating him as an invalid and start recognizing that things will return to normal.