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Optimism Blooms in Spring

Stock Market News

April 2006

Optimism Blooms in Spring

No matter where they stand on market predictions, Bulls and Bears might both agree that the recent choppy period offers few rewards to anyone. Optimists pounce on every up tick and just as quickly bail when the market stutters. However, hope springs eternal, and many Wall Street commentators are hoping to see certain sectors revive this spring. And so where are the experts looking to see gains? Here’s an overview of some current conventional-- and unconventional - viewpoints. As always, your investment decisions should be tailored to your specific goals, and fit the strategy you and your investment advisor have developed.

Small caps or large company stocks?
Many top money managers have predicted that it’s time for large caps to come back into their own, after five years or so of humdrum returns. However some respected experts (a minority at this time) believe this lackluster pattern is likely to continue. The contrarians suggest that smaller companies are likely to achieve annual results in excess of 8 percent (adjusted for inflation). Their argument is that smaller companies have more room for growth and that inflation inhibits the purchasing power of large companies more than that of small caps. Either way, finding the right small caps requires diligent research—especially as many fly beneath the radar of the researchers at major investment houses.

What comes around goes around
Recent surveys have shown that companies with good corporate governance (i.e. companies whose accounting procedures are sound, and whose directors provide proper independent oversight especially over compensation and audit committees) deliver better stock performance - growth rates that exceed market performance - over time.

The key phrase here is "better performance over time." Strong governance tends to lead to sustainable growth rather than huge short-term gains. Investors looking for dazzling speedy gains (and the risks of equally rapid loses that frequently accompany them) had better look elsewhere. Risky stocks may skyrocket but the odds favor an equally precipitous decline.

Is a springtime rally on the horizon?
Maybe. The mid-March stock market rally suggests that money managers are betting on the upside, and that analysts’ estimates and expectations have been trimmed enough - creating an environment where more companies may meet, or beat, the Street’s predictions.

A stronger economy?
Yes-- or perhaps no. New Fed Chairman Bernanke seems as adept at providing ammunition for both optimists and pessimists. On the plus side, February’s Consumer Confidence Index showed that better employment prospects have lifted Americans’ incomes and confidence in the U.S. economy to its highest level in four years. The Conference Board, the business research group that conducts the survey, noted that the improvement in consumers’ perceptions is a sign that the economy "gained steam in early 2006." Several pundits feel differently, citing jittery politics and lingering recessionary fears. Many of these commentators encourage investors to adjust their portfolio somewhat and to explore diversified mutual funds, exchange-traded funds (EFTs), and opportunities in emerging markets.

Whatever the future might hold, prudent investing involves researching various market viewpoints and following a long-term strategy. Your professional tax advisor and investment counselor can help you assess your best options.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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