Cautious on Stocks; Bullish on Energy
04/18/2016 9:00 am EST
The biggest event to watch this month is the rebound from the correction that hammered stocks earlier in the year; I predicted that a reversal was on the way, but its speed and power surprised me, notes Jim Powell, editor of Global Changes & Opportunities.
Now for the bad news; I don’t think the rally will continue much longer. Although improving conditions sparked the recovery, they are far from wonderful.
Economic growth has fallen from 2.0% in the 4th quarter of 2015 to just 0.7% so far this year. With consumers still watching their pennies, I think there is little chance of seeing a big economic jump anytime soon.
Perhaps Mother Market will surprise us, but as the old saying goes, “Hope isn’t a strategy.” We must plan for the most likely outlook, which keeps the odds of winning in our favor.
Corporate earnings are also looking a little better, but that’s not much cause for celebration. The earnings growth rate declined 9.6% in the 4th quarter.
Now it’s only down 4.6%. The change is in the right direction, but earnings growth is still off its peak.
The stock market was considerably oversold during the correction. Now it is fairly priced. Not only do I think the rally is unlikely to rise much higher, it could end quickly and go into reverse. In other words, the rebound could be a bear trap.
Where to invest now? In March, the price of oil also rose over the $40 mark. The bounce seems to confirm my belief that we have seen the bottom of energy prices.
However, a recovery still has a long way to go and our oil and gas stocks still remain attractive.
Ditto for the Energy Select SPDR ETF (XLE) for investors who would like more diversification.
By Jim Powell, Editor of Global Changes & Opportunities
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