What’s the market going to do?

I started investing in August of 2008 – right before the crash for those keeping track.  I watched my investment shrink by as much as 40% over the course of those six months, wishing I’d waited a few months to put money into the market.  Since then, I’ve made back those losses and made some decent gains, allowing a bit more calm and focus to step back and think about what’s going on.

“What’s going on” is possibly the most interesting several years of financial history I’ll experience, and it’s a fantastic chance to learn how things work.  I don’t like superstitious technical analysis, rather, I want to understand why things are behaving fundamentally as they do.

Following huge gains that brought the Dow up by 1500 points, there’s a lot of guessing about what will happen next.  Can we sustain such incredible gains?  Will we hit a second pullback or full-blown double-dip?  It’s hard to say but there are a few factors that I think will make a big impact.  I may be entirely wrong in every respect, but I feel it’s important to get things down in writing to force the ideas to be at least halfway thought out before they drive important financial decisions.

When things toppled, the first thing to go were jobs.  Human resources are the most expensive kind a company usually has so it’s a logical choice.  That works in the short term to cut costs, but to maintain some form of growth and sustain revenues, companies needed to find ways to make do with what they had.  Large parts of this came from coaxing greater contributions out of personnel who were just happy to have jobs.  Large parts also came from innovation from a technological and managerial standpoint.

When things are good, it’s easy to stagnate and be satisfied with mediocre performance – “who cares if we lose a few thousand, million, billion dollars here and there?  We’ll be fine.”  When things are rough, that’s when people look to unique ways of doing things in order to keep it all going.  Some fail, sure, but some develop remarkable things, and these innovations trickle down throughout the industry.

We’ve had a major run up in terms of stocks and company profits, but this isn’t making its way into peoples’ pockets yet.  Companies have trimmed their excess fat and aren’t eager to hire a bunch of employees back until they know they need them and know that it’s safe to do so without fear of another tumble.  In the next year or so, companies who have their stuff together will have swelled their ranks again, but it’s not going to happen immediately and it’s certainly not happening right away now.  Those numbers are still perilously close to 10% of the US population out of work…

…and yet the markets are exploding with positive earnings released across the board this quarter.  It would seem that things are poised to retreat for awhile until employment and other fundamental elements of the economy can catch up.  In the meantime, however, I believe that those companies that are still around and have proved themselves in leading the charge upwards will continue to do well.

Watch for a dip sometime in the next month or so.  I’d expect indexes to drop by maybe 5% with the Dow falling below 10,500 or even as low as the 10,000 mark, similar to the Jan.-Feb. dip.  At the same time, though, I’ll be ready to ride it down, expanding investment in those fundamentally strong companies that will pop up even stronger when it’s over.

Under-appreciated stocks I’d focus on are COSI, ENTG, DAVE, QCOM, CSCO, and TINY.  I’d even go so far as to advocate for C.  It’s made it through the roughest part of this ride and will wake up in a big way when that fear and paranoia subside.  In general, I think international markets are worth considering as well.  The rest of the world hasn’t had quite the same run so far that we have – which means there’s a lot of room for growth.

Despite the pain felt by Americans across the board, I’d almost go far as to say this was good for us.   When all is settled and done, we’ll be poised better as individuals and as a country to lead the post-recession global economy.  Just my two cents.

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