Our Economy and the Stock Market
By Saghir Aslam
Irvine, CA

 

The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)

With summer around the corner, investors are fretting about the return of something much more unpleasant than what we have seen recently the bear market.

Suddenly, there are reasons for worry that stocks could be entering a difficult period, including suddenly poor economic data, troubling signs from housing and a rush of companies selling shares. Traditionally 3 rd presidential year is the best for the market, but this time not working against it.

The Dow Jones Industrial Average fell 2.3% last week, its fifth down week in a row. The Dow is now down 5.2% from its post-crash high, set in May. Other stock indexes also are suffering. The Nasdaq Composite fell 2.3% and is now down 46% from its high. The Standard & Poor's 500-stock index was also off 2.3% for the week. So the down turn is across the border.

Highlighting the ugly week: The Dow tumbled nearly 280 points on Wednesday, its worst single day since August 2010, on fears that the U.S. economy is in the midst of a new slide-one that may be hard to halt because the government and Federal Reserve already have done so much to try to juice the economy. The results have not been there.

Despite the gloom and doom, it's important to remember the market is still sitting on respectable gains in 2011. So far this year, the Dow is up 5% the Nasdaq has gained 3% while the S&P 500 is up 3.4%.

Beyond that, the market has a lot going for it, including super-low interest rates, hefty corporate profit margins this is the hey that market may not suffer and attractive prices for shares of many stable, global companies. Some economists now expect the U.S. to grow at an annual rate of less than 3% in the months ahead, down from recent expectations of 3.5%. There is a difference between a slowing economy and one that is heading in reverse and right now the data only suggest mild slowing, which could end up being nothing. W should not overly worried about one or two months of hohum economic data.

The upshot: Investors should take profits from shares of growth companies that have soared, while shifting into safer companies, especially those benefiting from stronger growth in foreign markets, some investors think.

Investors are being bounced around, but instability should be expected as the global economy undergoes an historic rebalancing.

Our market is sanguine on the long-term outlook for U.S. and international stocks, especially those that will benefit from continued growth in China, Brazil and other emerging-market nations. Asia is rising and developed markets are consolidating. There are great opportunities for those who have the conviction to avoid short-term broker calls and embrace the big picture. That is what we should look at. However gas prices seem to be coming down.

Meanwhile, Europe continues to struggle to deal with the debt and growth problems of nations like Greece and Spain, and Moody's investors Service last week cut Greece's credit rating again. Even the U.S. credit rating is in question, rating agencies said, because politicians continue to debate the nation's debt ceiling. Meanwhile, the ratings of Bank of America, Citigroup and Wells Fargo could be cut because the government is expected to reduce its support for the largest financial companies.

Double-dip concerns are well founded. The government changed a flat tire in 2008 and now we're driving around without a spare.

Some have decided to exit ahead of September, the market's worst-performing month. The market's earnings yield, or the reciprocal of its price/earnings ratio, is about 2.5 percentage points higher than the yield on many investment-grade corporate bonds, the largest gap in more than a decade. That suggests stocks could be attractive, at least relative to many bonds, as long as those earnings aren't ephemeral.

Shares of many of these nations have done poorly lately, partly because their central banks have raised interest rates to combat inflation. Mining stocks, which have been aggressively sold in recent weeks, are very attractive right now (RIO), the second-largest mining company, which sports hefty cash flow. Industrial commodities are a perfect straddle for our times. China has an unrelenting demand for them, and they're a perfect hedge against Western money printing.

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)

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Editor: Akhtar M. Faruqui
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