Market Headwinds

11/29/2010


Eurozone concerns, North Korean aggression toward its neighbor to the south, a Wall Street insider-trading investigation whose breadth seems to grow by the day, and lowered economic expectations from the Federal Reserve Board have buffeted stocks in the near term.  In the absence of corporate-earnings announcements, investors will continue to fixate on a global news cycle that doesn't seem to promise much in the way of good news in the short run. Still, investors should not lose sight that the market's primary trend, according to the Dow Theory, is bullish. Thus, investors underweighted in equities may want to take advantage of near-term market volatility to buy quality stocks.

Global concerns

News of a bailout for Ireland and speculation that other eurozone countries may need cash quickly to stop their fiscal bleeding have roiled the global markets in recent trading. The fears of a “European contagion” washing up on our shores call to mind worries that impinged the stock market earlier this year as Greece teetered and required a bailout.

The market received another jolt on news that North Korea had fired artillery at a South Korean island near a disputed maritime border. Obviously, an escalation of aggression between the two countries — with the possibility of outsiders getting dragged into the fray — represents yet another wild card.

At home, the Fed lowered its expectations for economic growth in 2011, saying it expects unemployment to remain in the 9% range for the year. The dour forecast did not exactly embolden an investor populace already reeling in the wake of a seemingly far-reaching insider-trading probe and bad tidings from abroad.

While investors should not ignore the litany of bad news, they must keep such news in perspective. Ultimately, three factors — corporate profits, interest rates, and inflation — drive sustained market moves. Fortunately, corporate earnings remain strong and inflation low. And while interest rates have trended higher in recent weeks, rates remain near historically low levels. Thus, the major engines of stock-market performance are still firing and, when coupled with the bullish indications provided by the Dow Theory, point to a market that should resume its uptrend as the current headwinds subside.

Conclusion

With the Dow Theory in the bullish camp and quality stocks available at reasonable valuations, we are inclined to view pullbacks as opportunities to increase exposure to stocks. For now, we're keeping approximately 16% to 18% of our equity portfolios in a short-term bond fund.


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