It seems that investors react twice as strongly to negative news than they did before the stock-market crash of 2008.
Sluggish U.S. job growth, prudent American consumers, Europe's debt woes, China's economy — with each report comes an overreaction. The S&P 500 is little changed this year after jumping 65 percent from the low in March 2009 to the end of last year.
Blue-chips Bank of America , Microsoft , Chevron and Johnson & Johnson are being punished for Europe's follies.
Statistics show the U.S. recovery is in full swing and confidence is not only strong, but improving. (See links for detailed graphs.)
Here are 10 reasons to stay in the stock market — or to get back in if you're waiting for better days.
10. The Yale Institutional Crash Confidence Index measures the share of institutional investors who believe a market crash is improbable in the next six months. The index rose from 31.3 in April to 34.2 in May, indicating investors' feeling of safety increased.
9. The Yale Institutional 1-Year Confidence Index measures the percentage of institutional investors who think the Dow Jones Industrial Average will rise over the next 12 months. The index rose from 77.8 in April to 78.3 in May, reflecting improved confidence in the market's upside. Yet, the media continues to stress "de-risking" by money managers.
8. The Yale Individual 1-Year Confidence Index measures the percentage of individual investors who believe that the Dow will gain over the next 12 months. The index rose from 74.7 in April to 78.3 in May. The Federal Reserve estimates that $9.4 trillion is sitting in bank and money-market accounts. If individual investors start buying stocks, the market will ignite.
7. The Conference Board's Leading Economic Indicators Index, a predictor of near-term growth, rose from 109.6 in April to 109.9 in May. Although the increase was lower than expected, economists are maintaining forecasts of moderate growth. Of note: The index managed to gain, despite one input, stock prices, dropping more than expected.
6. The University of Michigan Consumer Sentiment Index is a monthly gauge of consumers' sentiment on the U.S. economy and their personal financial circumstances. The index rose from 73.6 in May to a preliminary reading of 75.5 in June. The U.S. consumer is still holding back the economic recovery, but appears to be gaining optimism.
Gross Margins and Cash Heaps
5. The ISM Manufacturing Index, released monthly by the Institute of Supply Management, assesses U.S. manufacturing activity. A value over 50 indicates economic growth.
The index declined from 60.4 in April to 59.7 in May. Although the decline is disheartening, the index shows that manufacturing activity is expanding and the recovery is stable.
4. The 10 largest US companies, measured by market value, achieved impressive quarterly sales growth. These Dow Jones Industrial Average components generally grow at the same pace as the economy because their operations are so massive. Disregard doomsday predictions. Corporate America is experiencing healthy top-line expansion.
3. The 10 largest U.S. companies used the recession to streamline their operations. They slashed debt and stockpiled cash. The repercussion of this prudence is high unemployment. American companies are running lean and mean, with the ammunition to grow inorganically through acquisitions.
2. Also on the rise are corporate profit margins. Lower compensation costs and fewer interest expenses have widened profit spreads. As the economy accelerates, new sales will plop to companies' bottom lines. Since stock prices are a reflection of corporate profit outlook, margins bode well for the market's upside. Here is a look at the gross margins of the big 10.
1. When buying anything, cost is the most important consideration. The easiest way to gauge a stock's cost is by dividing its price by projected earnings. This measure, known as forward P/E, demonstrates that large caps are historically cheap. The median P/E for S&P 500 stocks between 1920 and the present is 15. Some Dow stocks currently sell for P/Es of less than 8.
Disclosure information was not available for Lynch or his company.