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Short-Term
is the Best Place
If
you could look forward to the end of the year, which do you
thinks will be better off, the short-term investor or the
long-term investor?
Well there is an interesting tension developing in
the investment arena, which should cause the short-term investor
(holding a position for less than 60 days) to do remarkably
better than the long-term investor (holding a position for
6-18 months.) Now
don’t get me wrong, the long-term investor should be able
to make a small return on his investments this year but nothing
in comparison to the short-term investor.
There
is an interesting phenomenon going on this year.
The Federal Reserve is cutting interest rates.
That’s good for the stock market and almost always
leads to higher stock prices. More
and more people hold stocks than at any time before.
This is because there are more self-funded retirement
plans and more baby-boomers scurrying to fund their retirement
accounts in the last few years ahead of retirement.
Each and every pay period millions of dollars are deducted
from employees pay checks and sent off to a money manager,
many of which by their charters’ are only allowed to hold
a specified low percentage of their portfolios in cash, the
rest must be put into the market.
Each week these dollars are looking for a home in the
stock markets. These
purchases by fund managers increases the demand for stocks
and thus the price of stocks.
We have two great reasons for stocks to go up!
Now
here is the bad news.
Corporate earnings are one of the best forecasters
of stock prices.
In recent weeks we’ve seen reports of weaker earnings
from the most recent quarter, and guidance from many companies
for lower earnings in the next one to four quarters. If earnings forecast share prices than stock prices should
move lower over the coming year.
So on one hand we have two strong reasons for stocks
to move higher and on the other hand we have a good reason
for stocks to move lower. That is the tension that will entangle the stock market for
the bulk of the year.
All totaled the markets may be near equilibrium with
little impetus for them to move much higher or lower.
As the Fed cuts rates and fund managers buy stocks
the markets will move higher and then weak corporate earnings
will pull the markets lower. These forces will be in play for most of the year.
The year will likely be characterized by small swings
within a modest trading range.
Many long-term investors may be chagrined to see that
their portfolios are worth just as much at the end of the
year as they were at the beginning.
But for the short-term investor there will be many
nice up and down swings of a couple of hundred points for
the short-term investor to carry right to the bank.
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