Investors beware: Rally may not last!!

While investors are likely to see an end to the recession later this year, the current stock market rally be a harbinger of better times, according to an investment report presented by MFS Investment Management of Boston yesterday.
The economy will stop shrinking later this year, said James Swanson, chief investment strategist at MFS

But while economic recovery is in the works, the current rally — which began March 9 — may not be a sustainable one, but more of a “bull market episode,” he said.

“We may be on the way to a secular bull market,” Mr. Swanson said. “But I think the sustainable bull market will begin during the summer sometime. This may not be it. It could be liquidity driving stock prices up.”

Investors should be wary, he said.

“About 80% of the average stock prices are being driven by market action and not balance sheets, debt repayment or quality,” Mr. Swanson said. “In a bull market rally, 60% of the price should be driven by the market. For a sustainable bull market, you also need to see rising volumes, and we haven’t had rising volumes with this rally.”

Still, he believes that the economic recovery is in the works.

The housing market should stabilize in August because of affordability and government stimulus, Mr. Swanson said. “The government will keep mortgage rates low so the housing market can recover.”

When the economy turns around, the United States will lead the way to a global recovery, followed by China and the rest of the emerging markets, Mr. Swanson said. Stability will come later in Europe and Japan.

That said, Mr. Swanson suggests investors may want to look at adding international exposure in their portfolios.

“China will go back to 10% growth, which means there are a lot of earnings to come out of these emerging countries,” he said. “Looking to long-term growth, Americans should increase their [portfolio] weight internationally.”

Companies involved in metals, mining, manufacturing and construction could be poised for significant growth. “These could be companies [located] in those countries or those that sell products to those countries,” Mr. Swanson said.

Other ideas that investors may consider are Treasury inflation protected securities, dividend-paying stocks and high-grade corporate bonds with five- to seven-year maturities, he said.

Coming out of this recession, the inflation rate is expected to be 2%, he said. “I don’t think you will see inflation developing for a year,” Mr. Swanson said.

In terms of stocks, the cheapest stocks are international, large-cap companies with low debt and high-credit ratings, he said.

By the end of the year, Mr. Swanson projected that the Standard & Poor’s 500 stock index would end up in positive territory, with a 6% gain from the beginning of the year.