Tags: Defy | bears | Buy | Stocks

Reuters: 5 Reasons to Defy the Bears and Buy Stocks Now

Friday, 04 Nov 2011 01:27 PM

 

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The author is a Reuters columnist. The opinions expressed are his own.
Buying stocks shouldn't make sense now.

Yet despite all of the growling in Europe, there are still reasons why you should invest in U.S. stocks.

This is a contrarian view, to be sure. The last quarter was the worst for stocks since 2008, with the S&P 500 index suffering a 14 percent loss. For those keeping score at home, that wiped out some $2 trillion in wealth.

Adding salt to that wound is the Federal Reserve's slashing of its growth forecast for next year and anemic U.S. job growth.

So what cave am I living in? Am I optimistic the Greeks won't Zorba all over their debt-reduction agreements with the rest of Europe? Will there be contagion from Italy, Portugal or Spain? I can't answer those questions, but I do see attractive opportunities behind the headlines.

Here are five good reasons to be investing now:

• Hedge funds may belly up to the bar. Like most individual investors, hedge funds had a dour third quarter, losing an average 5 percent. While they beat the S&P 500, that's little consolation to their investors, who are paying hefty fees for hedgies to show some positive results. When the going gets tough, hedge fund managers start buying.

Many of them will go out of business if they don't produce decent returns. Watch for them to scoop up underpriced stocks in beaten-up sectors like financial services. That may trigger an overall market rally.

• Most U.S. companies are profitable, some are bargains. During the recession, many companies cut their payrolls to the bone. Of more than 300 companies that have reported earnings thus far, some seven out of 10 have beaten profit estimates. Instead of staffing up, quality companies have invested in more technology to lower their operating costs. Most multinationals have pieces of emerging markets, so their sales are diversified.

"Stocks look unequivocally attractive, particularly versus bonds -- as attractive as they have been since the 1950s," says Chris Alderson, leader of T Rowe Price's international investing team, in the company's latest newsletter (see http://link.reuters.com/kuf84s). You don't have to pick the stocks yourself, though. The iShares Russell 3000 Value Index exchange-traded fund, is a broad-based index of bargain-priced companies.

• You can be defensive and profit. Even if the rebound theory falls flat, you can play it safe. Look at sectors that will do well long term and won't be directly bruised by more global economic perils. For example, this winter people will still need to heat their homes, so that favors natural-gas and utilities funds like the FBR Gas Index or the Fidelity Select Utilities fund.

• Positive economic news may trickle in. No one quite knows how the economy will move, but employment and manufacturing have perked up in recent months. If those are reliable leading economic indicators, you have another catalyst for stocks.

"If the next couple of months are as good, we'll see much better GDP figures in 2012," notes Ingo Winzer, president of the Local Market Monitor. "After all, without inventory cuts the economy would have grown at a 3.5 percent rate in the third quarter. And with the inventory/sales ratio at an historic low, sales will quickly translate into new orders."

• U.S. and European leaders might get their act together. I'm not ready to say that peace, love and understanding has taken over, but I surmise that the Congressional debt negotiators will find some middle ground and European negotiators may advance a major debt restructuring plan at the G-20 summit. If they do, that's bullish for stocks.

Since I'm a skeptic at heart, I know that any number of gremlins can emerge. No matter what happens, forget about forecasts and mind your own goals and financial needs. You can't let the headlines dictate your risk tolerance and cash flow. Animal spirits, as Keynes characterized the market, are notoriously unpredictable.

© 2014 Thomson/Reuters. All rights reserved.

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