Kiplinger Connection
Stock Market • The Economy • Business Costs

Stock Market: Stocks are low, time to buy. Here are tips.
The Economy: Legislators continue to struggle to find a fix.
Business Costs: As commodities prices ease, so do materials.

Stock Market
In today’s economic and financial climate ... broad gloom punctuated by periodic gleams of hope ...
Investors may panic or become paralyzed. With the market clearly in bear territory ... the S&P 500 having recently joined other benchmarks in a 20% decline from its October 2007 peak ... some folks may be tempted to throw in the towel.

Don’t. It’s not the time to sell U.S. stocks.
If you’ve been buying ... dollar cost averaging, whether by contributing to a 401(k) or otherwise ...
Keep it up. In fact, if you have extra cash that you won’t need for at least three years, buy more.

Why? First, because the alternatives are poor. Returns on cash are very low and bonds, overvalued, especially Treasuries. For those seeking a safe yield, municipal bonds are the more attractive option. Foreign stocks are relatively more expensive. Real estate remains bogged down. As for commodities, most are at least fully priced ... some, very overpriced.

At today’s depressed prices, stocks appeal. With the S&P 500 price-to-earnings ratio at about 14-15 for the 2008 calendar year, shares in many companies are considerably undervalued by historical standards. What’s more, the earnings outlook is turning more positive: After dropping nearly 6% in 2007, earnings should grow about 5% this year and much more than that next.

Many companies’ shares have been unfairly battered in recent months: The list includes banks, such as Zions, M&T and BB&T, that are fundamentally sound but were caught up in the market tumble. Other firms that seem to fit the bill: American Express, Verizon, United Technologies, and 3M. Also ... retailers Coach, Bed Bath & Beyond, and giant fishing and outdoors merchandiser Cabela’s.
Health stocks are a clear value. Pharmaceuticals have been pummeled by patent expirations, the lack of new mega-drugs and increased regulatory scrutiny.
Chemical firms and independent refiners, such as Valero Energy, look good as oil prices continue to slide, easing the squeeze on margins such firms have faced.

But there’s a second good reason to stick with stocks, despite the volatility.
It’s in just such bear markets that the foundations of future gains are laid. We don’t know what the next six months will bring. The market may fall further. It may not. What we do know is this: The rebound from the bottom is usually steep. In the past nine bear markets, stocks fell an average of 12 additional percentage points after crossing the 20% threshold into bear territory. Seven times, the S&P rebounded to the 20% mark within a year. Four times, the S&P regained the peak inside a year.
Buying on the way down ensures that you’ll catch the big bounce up.

The Economy
It will be early next year before the Federal Reserve makes another move:
A rate hike. The Fed is shunning calls for a rate cut to buoy the economy, but won’t move to choke off inflation, either. The fact is, the U.S. monetary gurus haven’t much latitude ... simultaneously battling a credit and housing crisis, worsened by the faltering Fannie Mae and Freddie Mac, and soaring consumer prices, which rose 5% from June 2007 to June 2008, the biggest increase in 17 years.
Despite the economy's woes, we expect GDP to increase 1.5% this year, thanks to strong exports and a $134-billion stimulus package. Barring other shocks, 2009 will be a repeat performance. GDP isn’t the only measure of a recession, so the jury will remain out for a while. But only academics really care at this point.

You’ll hear plenty of talk about another stimulus. But odds are against it.
Democrats want to pump at least $50 billion more into the economy ... in taxpayer rebates, infrastructure spending, aid to states, low-income heating help, and food stamps. They argue that gas price hikes gobbled up the first rebates. McCain and other GOPers say that another goose to the economy is premature.
Shorter odds, of course, if the economy worsens or if McCain reconsiders. He’ll want to avoid "me too-ism," but he may decide that the move would gain votes. With or without McCain, agreeing on what and when to do it will be no easy task.

Before Congress bails out nearly insolvent Fannie Mae and Freddie Mac ...
Lawmakers will want to get their licks in, chastising the companies’ execs. They’re upset at the lack of self-policing and chagrined at how their own neglect contributed to the crisis. Republicans, in particular, will also want to make sure that taxpayers aren’t stuck with a huge bill. But all see the need to act swiftly.
The White House won’t get everything it wants in a rescue package, likely to be wrapped into housing legislation that Congress will approve this month. No unlimited lines of government credit, for example. But the Treasury Department will get the authority to buy shares of the mortgage giants as a last resort measure.

Ongoing credit market woes won’t stall the dollar’s turnaround this year. The buck’s value will fall a bit more, setting another record low against the euro. But then it should regain some of its attraction as a safe haven for investors as Europe slides fast into recession, slamming the euro, pound, and Swiss franc.
A recovery to about $1.50 against the euro is likely by midyear 2009.

Business Costs
At last, relief is on the horizon...lower prices for some commodities:
Copper, stainless steel, nickel, lead, and zinc. Look for all to head down in 2009 after the spikes of the past two years. Resulting lower costs for wiring, pipes, tubing, tools, and other items will raise profit margins for manufacturers and others.
One exception in the metals markets: Aluminum. Production downturns in Australia, China, and South Africa spell a 10% price increase. Used in the making of aircraft, lighting, appliances, containers, and more, aluminum has few substitutes.

Don’t count on a break in natural gas prices, either. The huge jump prices took this spring ... up about 66% from last year’s average ... will set a new floor. Look for prices to peak at $13-$14 per million British thermal units this summer, then slip back to around $11 per MMBtu in the fall. Figure on annual increases of a quarter or two through 2013. Production is rising about 1% a year, only half as fast as demand is. Waning output at older sites isn’t being offset by new finds. Moreover, Bush’s recent decision to lift an executive ban on deepwater exploration is meaningless. Congress would have to lift its ban, too...a political hot potato.
As for crude oil, we still expect prices to abate in the coming months. Demand in the U.S. and elsewhere is falling, though the supply cushion remains tight. Relative to historic oil prices, a barrel of crude will still be painfully expensive.