The recession is ending, markets are up and the Ashes have been regained. It's party time.
This stock market continues to wrong-foot me.
I've thought for a while now that banks were overvalued, opaque and at risk of sustaining more housing related losses.
I've thought for a while now some individual stocks were overvalued.
I've thought for a while now this stock market surge was simply a junk rally, with poor quality companies jumping hundreds of percentage points as the threat of bankruptcy all but disappeared.
Party Time
Even US Federal Reserve Chairman Ben Bernanke has jumped on the bandwagon, saying on the weekend "Prospects for a return to growth in the near term appear good."
What's good for the US economy is usually good for the global economy. And what's good for the US stock market is usually good for global stock markets.
It's time to party like you've just regained The Ashes.
Call me a boring, old, pessimistic Fool if you like, but I just can't shake the feeling that many shares have run too far, too fast.
Take a look at property website Rightmove (LSE: RMV) for example.
As David Holding said last week, the shares trade on a forward P/E of over 20. On Friday alone, the shares jumped close to 20%. I can only guess a good old short-squeeze was the culprit, because there is no way in the world their interim results merited such a huge jump in the share price.
200% Later And I've Missed The Boat
I happen to admire Rightmove, the company, and have them on my watchlist. Sadly, I didn't pull the trigger when the shares sank to 160p at the beginning of this year. I can only blame inertia, fear, lack of concentration or a dodgy Oval pitch.
With the shares now currently over 500p, I've completely missed the boat. Such is investing. There will be plenty more fish in the sea, although sadly finding the next 200% plus winner will be a much harder task.
Rightmove is a case of good company, bad price. Not everyone thinks as such, with Panmure Gordon maintain their "buy" rating on Rightmove and raising their target price for the shares to 600p. It's this sort of difference of opinion that makes for a dynamic market.
Recession Over, Party On Hold
Speaking of analysts, in general, I think there's a bit too much optimism in analyst forecasts for 2010 and 2011. It's all down to the economy.
The recession is ending. That's the good news, and believe me, it is welcome news. No-one, not even the most grizzly bear, would want to go through years of recession. One Great Depression is enough thank you very much.
But I still contend that the recovery will be slow, long and drawn out. Growth, whilst welcome, will be anaemic.
It is going to be difficult for good companies like Rightmove to meaningfully grow their sales. It's going to be incredibly difficult for debt-ridden companies operating in very competitive industries, like Yell (LSE: YELL), ITV (LSE: ITV) and Trinity Mirror (LSE: TNI) to maintain sales, let alone grow them.
The Bumpy Road Ahead
If the economy was on the verge of a strong rebound, you wouldn't have…
- The Bank Of England increasing their quantitative easing programme (printing money) to £175 billion, and Mervyn King voting to increase it even further to £200 billion.
- The base rate still at 0.5%, and set to stay there for an extended period of time.
- European Central Bank president Jean-Claude Trichet saying "…we have a very bumpy road ahead of us. We know that we have an enormous amount of work to do."
- Ben Bernanke also saying "…the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."
The Inevitable Crash?
I'm not trying to say all this means you should bail out of the stock market and wait for the inevitable crash. I'm certainly still invested in shares, although recently I have been doing more selling than buying.
What am I saying is, with the FTSE 100 up over 35% since it bottomed just over five months ago, now more than ever you need to concentrate on buying good companies at good to fair prices.
Luckily these investment opportunities still exist. Funnily enough, they exist more in the FTSE 100 than they do outside that index. I'm talking about large, durable, diversified, higher yielding companies like GlaxoSmithKline (LSE: GSK), Vodafone (LSE: VOD), BP (LSE: BP) and Unilever (LSE: ULVR), to name a few.
That's not to say there aren't opportunities outside the index of leading shares like the FTSE 250 company and AIM tiddler we profile in our free 2 Stocks You Should Buy Now report.
It's just you need to be selective. Despite the recession, the financial crisis, the sub-prime crisis, and the incredible day to day movements in the stock market, the old rules of investing still apply.
More on the economy and the markets:
> If you're in the market for buying and selling shares, consider opening an online broker account with The Motley Fool's Share Dealing Service. You can buy and sell shares in real time for a flat rate of just £10. Click here to find out how you can open an account for free today. There is no obligation to trade.
> Of the companies mentioned in this article, Bruce Jackson has an interest in GlaxoSmithKline.
