USA Corporate Profits & Dow Jones ForecastBusiness Cycle InvestorDJIA QUARTERLY FORECAST - MAY 30, 2008 |
MAY 30,
2008 RECOMMENDATION: S
T A Y I N
We recommend to stay invested in the Dow Jones Industrial Average Index
(DJIA) until the next quarterly update at the end of August 2008.
Review of the past Quarter
The First Quarter’s 2008 US NIPA Corporate Profits announced in May 2008 by the USA Government at www.bea.gov Table 6.16.D rose by +0.3% from previous quarter consistent with our expectations in the last March 27, 2008 forecast when we said: "...we should start seeing bottoming out of the Corporate Profits during Q1-2008 followed by the recovery in Q2-2008"
While the sentiment about the economy has been extremely bearish, the US stock market recovered since our March 27, 2008 BUY Recommendation when the Dow Jones was at 12,302 level. The DJIA index reached today 12,638 level, gaining +2.7% at +16.4% annualized growth rate and entered an upward trend (see chart above: IN Period #15). This was one of a typically well performing "IN Period" quarters. Similarly good returns were achieved for S&P500 index.
March 2008 saw a major turning point in the Corporate Profits and the USA stock market. That was not expected by a majority of economic experts and stock market strategists. The question now is how long will the upturn last.
The Fed reduced its benchmark interest rate by further 0.25% down to 2% since our last report and has been firmly supporting the financial system in concert with major central banks and regulators around the world by providing additional liquidity not only to commercial but also to the investment banks. Any shortages in the banks' capital base resulting from the subprime write-offs have been quickly restored by new funds raised from the central banks at very attractive low rates.
The actual economic activity indicators, announced over the past quarter, were not as bad as expected and we began to hear about "better than expected" profit results and outlooks from major companies. Some economic analysts are beginning to quietly talk about GDP outlook "not as bad" as earlier anticipated. The majority of the economist still however talk about the recession and only argue about its depth.
Despite all the gloom surrounding the credit and housing crisis and talk about the inevitable US recession, we have not even had one negative GDP quarter yet, let alone two negative quarters required to call it a proper recession.
The USA housing sector is still in a deep trouble with large excess inventory, falling level of constructions, crashing house prices so far by -13% on average from the peak and in some areas by -20-50%. Current year-to-date foreclosures are above 1 million and growing, expected to reach 2 million by year end. To put it in a perspective, there was around 1.5 million foreclosures last year in 2007; well above the "normal" level of 650 million foreclosures during a "good" year. More bad news and falling house prices are expected.
Yet, despite all that, the Real Estate stocks have been trending up since March 2008 and Financial shares are also in a recovery - the forward looking stock market is clearly expecting better times ahead.
The Next Quarter Outlook:
The jury is still out on the short/mid term direction of the USA economy measured by GDP growth and the extent of the credit and housing markets crisis. Is the worst behind us or will the collapse of the financial and real estate sectors deepen and spill over to the whole US economy sending it to a long awaited recession?
Our methodology is not concerned with forecasting the GDP trends or recessions as such because GDP lags the stock market and Corporate Profits trends. Instead, our Business Cycle Index aims to be a leading indicator of the turning points of the stock market and Corporate Profits that precede the GDP movements.
This quarter's value of our proprietary Business Cycle Index (green line on the charts above) points to a favorable environment for the USA Corporate Profits and stock market over the next few months and we recommend to "Stay In" the market.
We are in the early stages of the "In Period". The stock market may be still volatile and negatively influenced by prevailing deep pessimism, rock bottom consumer confidence and record oil price exceeding $135 per barrel. However, we expect the sentiment to improve after more optimistic Q2-2008 company profits and outlooks announcements.
Rapid and unexpected jumps in the oil price had historically negative impact on the stocks even during the "In Periods" and it is the risk factor that our methodology cannot forecast - especially over short term in a speculative environment. Cautious and more risk averse investors should bear it in mind because the oil price is currently very high, presenting a real risk for the short term US stock market performance.
The “IN PERIODS” identified by the proprietary formula have been historically characterized by solid and consistent returns underpinned by favorable macroeconomic fundamentals such as stronger Corporate Profits growth. The methodology delivered average 27% ungeared return per 15 months average "In Period" or 20% annualized over 60 years history, including last 4 years of actual results (see Performance record).
The Charts above illustrate recent performance until May 30, 2008.
Next quarterly update is planned for end August 2008.
Sincerely
The
Business Cycle Investor
May 30, 2008
___________________________________________________________________
Individuals invest directly in the large USA market index Exchange Traded Funds (ETF) that trace Dow Jones Industrial Average or Standard & Poor's S&P 500 indexes or in an equivalent liquid USA market index mutual funds.
The ETF funds trade on the stock market just like normal stocks. One transaction in ETFs provide investors with diversified blue chip portfolio and solid dividends. Transaction and management costs are minimal.
The proprietary Business Cycle Index is an effective leading indicator of corporate profitability for the whole USA economy. The aggregate US Corporate Profits are calculated quarterly by the USA Government and published at www.bea.gov where subscribers may independently verify the forecast.
Corporate Profits have historically shown a high 93% correlation with moves in the major diversified USA stock market indexes: Dow Jones Industrial Average (DJIA) and S&P 500. Hence, the Business Cycle Index can be used as a leading indicator of the broad USA stock market.
The Corporate Profits for the whole US economy don't always move in the same direction or by the same magnitude as the profits reported by individual companies or even the DJIA or S&P 500.
More information about the research methodology can be found at www.businesscycleinvestor.com/methodology.htm
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