Are the Bears on the Verge of Capitulation? 9/7/12

The markets continually defy popular sentiment and that is very evident in 2012.  The year started with the majority of the commentators and forecasters predicting “new normal” growth rates of 3-5% for the U.S. Stock market.  The constant media “fear peddling” led many investors to continue to move assets to cash, CD’s and Treasury Bonds.  Much like we all felt in 2008, as we watched our investments go down significantly, investors who remain out of the market today are getting that same “sick to my stomach” feeling as they watch from the sidelines as stocks continue their rise…  My point is not to rub it in – it is simply to discuss an important process that appears to be underway and that is investor “capitulation”.

In our opinion, we faced a historic moment this year.  Had we seen panic selling come back into the markets due to a collapse in the European Union or some other macro event, it is quite likely that many investors simply would have considered throwing in the towel because they simply could not stomach any more market selloffs.  However, investors who remain out of the stock markets are now close to capitulating and are beginning to feel that they have no choice but to start buying higher yielding dividend paying stocks as their frustration builds that have missed out on these excellent market gains that we have seen in 2012.  We think this process will continue to take place if the uncertainty with the U.S. elections, Europe and China continues to improve.  And as more of this capitulation occurs, the some bears may turn bullish, and this could lead to a snow ball effect for the markets to rise even higher.

The Blackrock research report below discusses a similar theme that the aging population in the U.S. and Europe will actually lead investors to allocate more and more of their investments to stocks, which will provide a long-term catalyst for the markets.  This is an interesting article because it is somewhat contrary to historic asset allocation guidelines.  In the short-term, with bond and other fixed income yields at historic lows, we agree that investors will seek higher returns, and this could lead to rotation of money into stocks for the foreseeable future.

Economic data this week included:

The U.S. employment report was released today, showing that we added 96,000 new jobs in the month of August.  This was lower than the consensus estimate of 130,000.  The unemployment rate, however, actually dropped to 8.1%, which can be attributed to an estimated 368,000 people that “gave up” on looking for work.  The numbers show that the economy continues to move sideways.  Even though the economy has added jobs every month since October 2010, the economy has not been able to generate the kind of velocity needed to lower the unemployment rate.  The main issue is that when one sector vamps up its hiring, another lays off some workers.  Studies continue to show that employers are hesitant to add employees due to the economic uncertainty, as well as the looming fiscal cliff.   The Wall Street Journal chart below shows the rise/fall of payrolls, as well as the unemployment rate.  As you can see, unemployment tends to fall as we add a very high number of jobs, but stays relatively flat when we add a smaller number of jobs.

On another note,  China approved plans this week to build 2,018 kilometers (1,254 miles) of new roads, spurring the biggest stock market rally in almost eight months on signs the government is stepping up stimulus efforts to revive economic growth. The government also backed nine sewage-treatment plants, five port and warehouse projects, and two waterway upgrades, according to statements on the website of the National Development and Reform Commission yesterday.   They are ramping up spending to help bolster growth that’s cooled to the slowest pace in three years. The announcements came a day after the approval for subway projects in 18 cities was announced.

Have a great weekend.  Try to get outside and enjoy the perfect weather!