The recent run-up in the market has had me questioning my judgment that cash is the best place to be right now (review: cash accounts currently pay just over 5% risk free).
The stock market used to be a great indicator of economic health, showing the collective guesses of millions of people on profits and growth. This is why the stock market is part of the Conference Board’s index of leading indicators. And yet over the last 3 months the leading indicators have declined (on a year-to-year basis) while the market climbs -- basically most of the economic indicators except the stock market show weakness.
David Rosenberg, chief North American economist at Merrill Lynch & Co., thinks there is a "disconnect between how the economy is doing and the way the equity market is doing." The
This morning first quarter GDP was reported at 1.3%, below even the pessimistic predictions of 1.5%. Trade and inventories reduced growth significantly, business and government spending growth was tiny – almost all the growth was driven by consumer spending. Consumer spending, however, seems to be giving mixed signals. Reuters and the
So what does this mean for the future? The quote above from David Rosenberg shows one economists view. Meanwhile Ed Hyman, chief economist at ISI Group, a
The Hyman argument bothers me. It suggests he believes stock prices will go up because the returns from cash and bonds will be low, forcing people to buy stocks if they want returns. But this sort of logic ignores profits and stock values completely. Personally I am a fan of rock solid value investing using present value analysis. And it works! My buy list of value stocks blasted market returns last year, and they’ve been climbing like rockets this year too.
I still hold my buy list stocks (this is a real money portfolio after all), but I also still think that cash is a better place for money not specifically in a target stock. I believe the indexes will not outpace current 5% cash returns during this year. It’s stressful to be holding cash while the market climbs, but will feel good during the drop.