Tuesday, July 3, 2012

Stock Market: Climbing A Wall Of Worry

The media are singing songs of doom and gloom, but instead of the flood of negative news, stocks are rising. Today the U.S. stock market (S&P 500) continued its June rally and gained 0.6%. This was the 3rd positive day for the S&P in a row and an addition of around 7% since start of June.

The stock market is climbing a wall of worry - as it often does. There are a lot of reasons for that:

1. Each day we get a deluge of news and not all is good. The media focuses on the bad news (dog bites man) because these get more attention. Good news is usually underplayed. Therefore the news focus these days on the mess in Greece and Spain - both are countries which are of little importance for the global economy - and downplay positive developments like the turnaround of the U.S. home market. The real economic situation of the world is better than the sentiment which is mirrored in the media reports.

2. Many market participants are blinded by the gloomy sentiment and are betting on a economic disaster. But the sluggish news signal just a temporary slowing - which is a part of any economical upswing - and is far away from any apocalypse which the ├╝ber-bears like Soros or Krugman are lecturing us about.

3.. Stocks are undervalued as a result of the gloomy sentiment and don`t reflect the strong profit growth of the companies. And many funds are underinvested. Their huge dormant cash piles carry a growing pressure to invest in profitable assets like stocks with the prospect of further gains.

Therefore the rally should continue in the coming months.

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