By Karan Kumar — Exclusive to Resource Investing News
The European debt crisis, the continuing Greece saga, the uncertainty of the Arab spring, and most of all, the uncertainty the world economy is navigating through, seem to have had no impact on the performance of world stock markets, many of which are now showing their best performances since May 2008.
The S&P 500 Index was up 8.6 percent for the first two months of this year. The last time it gave a return better than 8.6 percent through February was in 1991, when it gained 11.2 percent. The Dow Jones Industrial Average (INDEXDJX:DJI) has risen 7.2 percent in the past three months, and as of close on March 4, the S&P/TSX Composite Index (TSX:OSPTX) had risen as much as 4.8 percent.
Even though stock markets are rising they are “silent bull markets” or “stealth bull markets” because retail investors are not participating in the rally. The main reasons that the markets are rising are that the worst risks seem to have passed, and stocks, especially in the United States, are at their cheapest levels in more than two decades.
Worst risks have passed
“Stocks have just gotten too cheap,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in an interview with Bloomberg. “We were worrying about a Chinese hard landing that didn’t happen. We worried about a US double dip and that didn’t happen. We worried about Europe disintegrating, that didn’t happen. The worst risks have passed.”
But if the worst risks have passed, why are retail investors still shying away from buying stocks? That reason is hard to predict. Distrust among retail investors is a major reason for the hold back, wrote Matt Krantz, a financial markets reporter, in an article for USA Today.
“Investors can’t wipe from their minds the pain they’ve been through,” Krantz states. “While this year has started well for the bulls, investors have been subjected to brutal ups and downs in the past decade. The Standard & Poor’s 500 index, for instance, declined 37 percent in 2008, impaling many investors’ dreams for retirement at the time.” Further, “the price of gold continues to rise as investors distrust financial assets.”
Forbes magazine echoed Krantz’s view with the statement that “there is a lot of fear out there about this market, which has been nothing short of astounding so far in 2012. It’s an indication that there is plenty of money still sitting on the sidelines that these worriers are holding onto, because they’re afraid to deploy it into the market.”
Too early to tell for resource sector
It is still too early to tell if the mining and energy sectors would benefit if retail investors were to cast aside their distrust of stocks and start buying again. Energy, mining, and other resource companies make up about half the value of the TSX composite, including major names such as Suncor Energy Inc. (TSX:SU), Barrick Gold Corp. (TSX:ABX), PotashCorp (TSX:POT), and Teck (TSX:TCK.A).
William Horton, chief investment officer at MD Physician Services, which manages more than C$21 billion in assets, said in a recent article in the Financial Post that in time, Canadian resource companies will benefit from the stronger growth expected in emerging economies compared to developed markets. But investors are currently more focused on Europe’s problems.
“Is Canada positioned to link to this two-speed economy? The answer is, long term, absolutely. But short-term, investors are less certain about whether this two-speed global growth construct is going to play out,” Horton said.
Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.
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