By Matt Towery –
The market is in what amounts to a correction, and perhaps a deep one. Readers might recall my Creators Syndicate column of April of this year. The headline read “Major Opinion Index Might Be Warning of Big Changes in Market and Economy.” Our research partner OpinionSavvy had examined all of the public opinion surveys relating to the economy and concluded that one such poll/survey might be instructive as to the future of the stock market and the economy in the U.S. As it turns out their analysis was completely on target. Consider these excerpts from that Creators column of April 23, 2015:
“Since 1978, the University of Michigan has conducted their Survey of Consumers, which includes what they term the “Index of Consumer Sentiment.” While no one survey or poll can guarantee a projection into the future, the research produced suggests that this particular index, if used as a quarterly measurement, often is a precursor to downward shifts in the stock market.
The Opinion Savvy study states, ‘While opinion usually follows the economy, at some points over the past 40 years, opinion has outpaced the market.” The study adds that, ‘When this happens, it seems to spell disaster.’
Ouch!
While this conclusion might engage in a bit of hyperbole, the graphs and charts and numbers they provide are fairly convincing that, at the very least, when the Michigan Index of Consumer Sentiment climbs really high, the financial markets in the U.S. decline in the ensuing months.
What gets one’s attention is that the index had reached a nearly off-the-charts high by the end of the second quarter in 2007. We all know what followed just months later as our financial institutions started to go into a near-death spiral and the economy followed with the Great Recession, which about did us in.
The real shocker is that this same index is now at its highest level since those chart-busting early days of 2007. While the Opinion Savvy chart for the most recent data ends with data from the end of 2014, the research report states that the index has climbed from a score in the low 80s in the last quarter of 2014 to a current index number of 96. The study focuses on the index number reported for the first month of each quarter. That means April’s number is perilously close to the 97 score that was reported in early 2007.
The same report is quick to note that there is no causal relationship between the Michigan Index and the U.S. equity markets. But they make a strong case that when sentiment is rocketing up the chart, markets drop, often substantially, within a matter of months, not years, thereafter.”
In Newsvesting, we take news and opinion and make both our guide to our investment strategies. From the moment that OpinionSavvy analysis appeared, the market traded mostly sideways. Then within “a matter of months, not years” as the analysis proclaimed, the market started to drop like a rock. Based in the futures as of 6:45 AM this morning, that drop was likely to continue.
So, what should investors do now?
Definitely do not sell. That is unless individual investors are tied to margins which will force them to do so. And therein lies a bit of the problem when a correction starts to take place swiftly. Stocks purchased with borrowed money can force the sale of shares. And as those sales accelerate, so too does a market decline.
For those who moved to a stronger cash position after the April OpinionSavvy warning, this down market provides great opportunity. Here are just a few sectors that deserve attention:
* Healthcare: The big healthcare companies, particularly the insurance ones that are reaping the bounty of Obamacare, have a guaranteed increasing market and little competition as to price. While a market downdraft will take these companies down with them, they will likely spring back to life much faster and increase their share value more substantially than those in other sectors if and when this current meltdown comes to an end.
* Defense/Military: While these companies usually see their shares follow downturns in the market, they pay nice dividends and are virtually guaranteed to bounce back. After all, the combination of the post-Arab spring era and the likely nuclear agreement with Iran has most of the Middle East racing to purchase arms of all types. And other nations aren’t far behind in bolstering their military and defense capabilities.
Where Newsvetors should be wary is in areas like housing and commercial real estate. The Wall Street Journal ran a foreboding story earlier this month, suggesting that the build-up in office space across the nation, might be creating a new glut. With businesses reaching near panic mode, it’s likely that the office/commercial real estate market will suffer in the coming months. And the housing market could quickly dry up if the public perceives this market correction to be a part of an overall slowdown in economic growth.
As for oil, it was a great way to “trade on the bounce” late last year and into the early summer of this year. But those who are Newsvesting in the area now must carefully choose the stronger petrochemical and refinery companies that have the strength and resources to last through a choppy and depressed market that could take years to recover. But when oil comes back, as it inevitably will, purchases of shares in strong companies at historic lows will prove to be a very lucrative decision.
Oh, and about that rate increase by the Fed….forget about it!
Note: Newsvesting is trade mark pending. The analysis and opinions presented are just opinion and in no way offer professional investment advice. I making financial investments you should contact a licensed professional and make decisions independently without reliance on this column. Matt Towery’s new book Newsvesting: Use News and Opinion to Grow Your Personal Wealth will be released in October.