Bull markets usually end in periods of euphoria, when the vast majority of investors have fallen in love with equities and believe the only direction is up. The current bull market is certainly not threatened by euphoria, due to the fact that overall, investors are still skeptical – to say the least. In addition, it is an election year and incumbents, of any party, want to paint as rosy of a picture as possible. As such, the real threat to this market is apathy.
- Corporate profit margins could be peaking due to higher costs. With the possibility of higher taxes on the horizon combined with minimal wage increases, consumers will have less to spend as the result of prices increasing at a faster rate than their income.
- There is an abundant supply of oil and natural gas on the market; however, tensions in the Middle East and Africa continue to threaten supplies and here in the U.S., at the current rate of exploration, cannot make up the slack if there were a disruption. Iran, Syria and Nigeria are just a few cast of characters whom can disrupt some of the world’s oil supply. Realistically, I would hope and somewhat believe Iran may take a more conciliatory approach with the rest of the world in regards to their nuclear ambitions and threats of closing a huge oil shipping channel, the Strait of Hormuz. Otherwise, the alternatives would result in nasty global economic reverberations in the short-term and detrimental in the longer term to the Middle East. In addition, Syria’s oppressive leader is facing an overthrow at some point, based upon his brutal behavior toward his people. Finally, emerging oil producing countries like Nigeria are seeing their potential being squandered due to political turmoil.
Energy prices could decrease in the years ahead; however, there are several geo-political hurdles domestically and internationally that are delaying such progress.
Unfortunately, gasoline prices are higher today than they were at this same time in 2008, when oil prices hit their historic highs. The above items noted, combined with a continuing decline in U.S. oil refining capacity may very well result in much higher gasoline prices this year, which is more hurtful to almost every sector of the U.S. economy than tax increases. As such, we need the powers that be in D.C. to come up with workable, long-term energy plan. Otherwise, we will see our access to available, stable supplies of oil from within and in the border nations of the United States either be restricted or rerouted overseas to countries like China. I would much rather make a prudent, permanent push for exploration and transportation of oil within North America, than try and come up with some short-term band-aid, like tapping the U.S.’s strategic oil reserves once the price again hits historic levels. This may sound like a political statement, but high oil prices and depending on politically unstable regions for our supply is insanity. Why continue to buy oil from oppressive regimes, who can reap large profits and push up oil prices by just threatening to disrupt supplies and who subject their citizens to living conditions make the sweat shops in China look like Disneyland, especially when we can take steps now that will allow us to dramatically decrease our dependency on them in the years ahead? China has already figured this out and is purchasing interests in oil and natural gas fields across the globe, including here in the U.S.
- The S&P 500 and other stock indices domestically and internationally markets have shown great resilience over the last several months, and it appears the U.S. is leading the charge. However, there is some concern that one or two companies within the S&P 500 can have a disproportional influence on the entire index. For example, AAPL is the envy of the investment world and rightly deserves that status due to the company’s innovative products, and its stock’s performance reflects this.
However, the following chart illustrates how this one company has grown so large and influential, that it distorts the true economic numbers of the entire index.
In relation to the technology sector, Apple’s impact is even more distortional. Apple’s makes up 17% of the Nasdaq-100 index, which is more than Google, Intel and Amazon combined. David Kostin, chief U.S. equity strategist at Goldman Sachs, forecasts that the technology sector will increase its earnings by 21% in the fourth quarter of 2011 compared to a year earlier. But that would shrink to roughly 5% once Apple is factored out.
By no means do I mean to demonize Apple, but my objective is to just point out that one, two or just a few companies can distort, positively or negatively, actual or overall trends taking place in corporate profits and stock prices.
In closing, Europe continues to make strides to corral Greece and the other problem economies. Unfortunately, Germany, which should be poster child of how to revive an economy, can only do so much. Currently various policies are being implemented may calm the markets and this combined with additional good news regarding unemployment will boost our markets in the near term. We should all be aware that true solutions to most of Europe’s problems, and even here domestically, have only been delayed. The true economic medicine may be doled out slowly over time and there will be some negative stock market, economic and standard of living effects as a result. I am not predicting a doomsday scenario by any means, but definitely some economic discomfort. However, this does not seem to be the situation in the near term.
Quotes
“The test of courage comes when you are in the minority. The test of tolerance comes when you are in the majority.”
Ralph W. Sockman, pastor, author and speaker
“There are too many people who get degrees and think that they’re educated. In order to be a truly knowledgeable person one has got to be engaged in serious, systematic, lifelong learning.”
Benjamin Payton, Tuskegee University President
“When you handle yourself, use your head; when you handle others, use your heart.”
Donna Reed, actress
Tony Moeller, CPA
Integrity Investment Advisors
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