Why Investors Have Reason To Be Optimistic

bullish buyIn the midst of the recent market gloom, Russ takes a step back and considers a few reasons for optimism.

thammarat_thammarongrat / Shutterstock

thammarat_thammarongrat / Shutterstock

While stocks began this week higher, it’s hard to maintain much optimism.

According to Bloomberg data, a broad measure of global equities (the MSCI ACWI Index) entered a bear market last week, credit markets are under the most stress since 2009 and oil continues to test levels not seen in over a decade. Fears over the banking sector and a global recession are rising.

I wouldn’t dismiss these threats. Risks of a more severe global slowdown have indeed grown lately and credit markets, including those beyond high yield, are increasingly fragile. Still, in the midst of the gloom, it’s worth stepping back and considering a few reasons for optimism.

WHY IT’S NOT ALL GLOOM AND DOOM

Leading indicators still look okay. Much of this year’s selling has been driven by recession fears. However, most leading indicators about the U.S. and global economies don’t yet confirm this view. As data via Bloomberg show, my preferred measure for the U.S. economy, the Chicago Fed National Activity Index (CFNAI), is right where it has been for most of the past five years: low but still consistent with growth. The 3-month moving average is at -0.24. By contrast, in early 2008, the 3-month average was already at -1, a much more significant deviation from the norm.

Other leading indicators paint a similar picture. With regards to the U.S., the Conference Board measure of Leading Economic Indicators is up 2.7 percent from a year ago. In early 2008, it was down more than 5 percent. Even the U.S. manufacturing sector is showing early signs of stabilization. The new orders component of the ISM survey recently bounced back into expansion territory (defined as a reading higher than 50).

Valuations are reasonable. U.S. equities, as represented by the S&P 500 Index, trade at less than 14x forward earnings. In Europe, the multiple for the MSCI EMU Index is below 11. Many emerging markets, notably China, South Korea and Brazil are trading at below 10x earnings, according to Bloomberg data for their respective MSCI indices.

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