Sunday, June 15, 2008

Could The Market React Differently This Time?

I am always skeptical when market strategists state things are different this time around. In the run up to the technology bubble in early 2000, many market strategists tried to justify higher P/Es due to the growth of the internet. Until 18-months ago, the rapid inflation in real estate prices was partly supported by strategists citing the growth of the baby boomers and their desire to purchase second homes.

In a recent market commentary, New Paradigm Ahead?, by Liz Ann Sounders, Schwab's (SCHW) Chief Investment Strategist, Liz Ann makes a case for higher U.S. equity prices. She details sixteen events that may occur that may lead up to a better U.S. equity market:
  • U.S. economy slows dramatically (check)
  • U.S. Fed cuts interest rates dramatically (check)
  • Dollar sinks further (check)
  • Commodity prices go parabolic (check)
  • Speculative hoarding of commodities ensues (check)
  • Regulators and Congress rev up the anti-speculation rhetoric (check)
  • Commodity-hungry emerging economies suffer (check)
  • Global growth suffers, including noticeably in China (check)
  • Investors shift funds from international stocks to commodities (check)
  • Non-U.S. central banks consider rate cuts to fight growth slowdown (pending?)
  • U.S. Fed enters pause mode (could be there already)
  • Rate differentials support dollar rally (fledgling rally so far)
  • Commodity prices begin to correct (fledgling correction so far)
  • Commodities move from U.S. economic headwind to tailwind (pending?)
  • Lower commodities/inflation supports U.S. valuation expansion (pending?)
  • Investors shift from international stocks/commodities to U.S. stocks (pending?)
In the above list, Liz Ann has "checked" the events that have occurred to date.

I am always skeptical of the "it is different this time" belief; however, could the above events lead to higher equity prices?

Source:

New Paradigm Ahead?
Charles Schwab & Company
By Liz Ann Sounders, Chief Investment Strategist
May 16, 2008
http://www.schwab.com/public/schwab/research_strategies/market_insight/todays_market/recent_commentary/new_paradigm_ahead.html?cmsid=P-2603064&lvl1=research_strategies&lvl2=market_insight&refid=P-2413636&refpid=P-994224


No comments :