A flurry of government activity has failed to stem the one factor most bedeviling the economy—uncertainty—and stocks could be paying the price for months to come.
Congressional deals regarding both a bank rescue and economic stimulus have failed to break the market out of a fairly tight trading range since the Nov. 20 lows.
In fact, a series of White House missteps regarding the economy and the direction in which the new administration will steer the country has seemed only to add to the nervousness rattling investors.
"For us to break out of this we're going to need some type of resolution and some type of clarity for an upside or downside breakout," says Ryan Detrick, an analyst at Schaeffer's Investment Research in Cincinnati. "There's so much uncertainty. The market is volatile, obviously, but at the same time we've gone virtually nowhere for months."
To that point, the Dow hit 7,552 on Nov. 20 and has since then seen a changing in administration that triggered a flurry of activity aimed at directing more than $1 trillion towards resurrecting the economy and saving anything with even a remote connection to the financial industry.
All that noise has generated just a 4 percent bounce off that low—and a 10 percent drop in the Dow in calendar 2009.
So what to do in such a stagnant climate?
Those not stashing their money in mattresses are finding a difficult road to making money. Gold has become an increasingly popular safe-haven play, while Detrick says he thinks some other commodity plays also will do well. Still others are simply staying put, while shorting bonds and other aspects of the market also could come back into vogue if the market manages to breach those November lows.
"There are so many people grasping for straws on what to do right now. Gold is one of those options," says Craig Smith, CEO of Swiss America Trading, a Phoenix-based investment firm that specializes in gold and silver coin trading. "I don't think Washington really has a good handle on what is happening right now."
Sideways or Worse
An economy mired in steep job losses and an undercurrent of political tumult has many investment pros worried about what's next.
"The bottom line is jobs. Until people stop losing jobs like they are, the economy is going to continue to sputter and that is going to be an issue for the overall stock market," Detrick says. "We wouldn't be shocked at all ... if it's a sideways market for the next couple of months and maybe longer."
That view, shared by many others, makes it a tough sell to get investors to buy into a lethargic market.
"I don't see any particular reason to gin up the machinery yet. We're in show-me mode now," says Diane de Vries Ashley, managing partner at Zenith Capital Partners in Coral Gables, Fla. "That does not necessarily mean I think that's a wonderful thing. It's like ... a slow death watch. How low can we go before the politics can be tossed aside and some genuine common sense can prevail?"
A sense of uncertainty from the Obama administration, which has been hit hard by three Commerce secretary appointments going by the wayside and a disastrous bank bailout presentation by Treasury Secretary Timothy Geithner this week, has added to the unease.
"Regular Americans are just fed up. Obama seems to keep making these missteps and it sounds like he's campaigning," says Kathy Boyle, President of Chapin Hill Advisors in New York. "Unemployment keeps rising. People think things are not getting better."
Things, in fact, could get worse, Boyle says.
Should the market break through the lows, Boyle says an S&P 500 at 738 in the fairly near term is a possibility, with the index heading to 640 in the longer term, according to her forecasting service, Fortucast.
Go For the Gold—and Steel
In such times, investment pros look for pockets of strength to escape the reality that the broader market is unlikely to do much.
Commodity-related plays could be popular in such a climate as the traditional headline-grabbing companies continue to announce job cuts and lower outlooks ahead.
Schnitzer Steel Industries , which manufactures and exports recycled steel and iron products, is one such company that could work for investors, Detrick says. Some analysts like Schnitzer and other smaller steel companies that can escape the economic fray weighing on competitors and as the Obama administration approves a raft of infrastructure projects.
Along the same lines but in the technology realm, Detrick thinks Palm could be a company that eludes some of the consumer-based pressure that will hit its competitors such as Apple and Microsoft.
Smith, though, he sees people flocking to gold in huge numbers--almost too much for his comfort.
Exchange-traded fund moves, such as through the SPDR Gold Trust, are not necessarily supported by the amount of physical gold people are taking possession of, raising concerns that the metal could be hitting a speculative bubble.
"I hope they're not using gold derivatives or options," Smith says.
Gold prices have gained more than 5 percent this week as the economic uncertainty has built, and that's a trend Smith sees continuing. While he says predictions of gold hitting $5,000 an ounce are overblown, he does believe gold at $1,200 by the end of this year and around $2,300 in two years or so is realistic.
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"My product traditionally does well when people's confidence is waning," Smith says. "They know if they can hold an ounce of gold in their hands that Bernie Madoff is not going to run off with it."
The move to gold also is spurred by an outlook that Treasurys will be a poor investment as the government continues to float more and more debt to pay for its raft of new programs.
Boyle is in two ETFs that short Treasurys--the ProShares UltraShort 20+ Year Treasury that pays twice the inverse of the Lehman Brothers 20+ Treasury Index, and the Direxion 10 Year Note Bear ETF that pays two and a half times the inverse of the 10-year Treasury.
The play is reflective of a general pessimism in the traditional investing instruments.
"Everybody is trying to say we're almost out of it and the market turns before the economy turns," Boyle says. "I don't see any hope. That's the problem, and I see things getting progressively worse."