The US recession is over. Risk is back in vogue. Is it time to load up on shares?
The US recession is officially over. US gross domestic product (GDP) grew at an annual rate of 3.5%, after shrinking in each of the past four quarters.
God save America. Or should it be more like Obama saved America? It appears the Cash For Clunkers programme, whereby the government rebated up to $4,500 to new car buyers, played a huge part in the third-quarter economic growth. The Bureau of Economic Analysis admitted as much, saying "The third-quarter increase largely reflected motor vehicle purchases..."
As colleague Morgan Housel succinctly put it over at Fool.com… "So, yes, GDP grew handsomely in the third quarter. But an overwhelming amount of the gain was attributable to Cash for Clunkers, which is now extinct. Lies, damned lies, and statistics, people."
Waterloo
Still, the stock market wasn't in any doubt the news was all good, with the Dow Jones jumping 200 points, its biggest advance since July.
The bulls were fast out of the blocks, with Bloomberg quoting William Stone of PNC Wealth Management as saying…"The fourth quarter will be the Waterloo of the bears… We are in economic recovery both in the US and globally, so you will eventually see revenue growth because you are seeing the recovery hold."
Bloomberg also quoted Jeffrey Kleintop of LPL Financial as saying…"The stock rally is not over yet… The stock market can celebrate. This news is an important confidence boost, in particular to individual investors."
Load Up On Shares?
So is it time to load up on shares?
Maybe.
However, none of this US stock jock high fiving should change the fundamentals of investing. Put simply, your goal as an investor is to buy good companies when they are trading at reasonable prices.
Only a few short months ago we had a short window of opportunity, where good companies were trading at great prices. Investors could have made small fortunes snapping up shares like Barclays (LSE: BARC), Vedanta Resources (LSE: VED) and Invensys (LSE: ISYS).
Those heady days have now passed -- a market rising 50% in just under 8 months will put pay to most screaming bargains. In fact, in more than a few cases, it has resulted in some over-priced shares, like Carpetright (LSE: CPR), for example.
Risk Is Back
You need to balance risk and reward. Risk is back in favour right now, most graphically witnessed in the currency markets. With the good economic news coming out of the US, you'd think it would have a positive effect on the US dollar. After all, an economic recovery will ultimately lead to higher interest rates, and from a level of 0%, the only way for interest rates is up.
Yet the US dollar fell on the strong economic news. As reported on Reuters, Michael Woolfolk, senior currency strategist at BNY Mellon, said…"With Q3 GDP living up to its billing this morning, players are returning to the carry trade again, driving the dollar and yen decidedly lower."
The carry trade involves selling low-yielding currencies such as the US dollar and yen and buying currencies with relatively higher interest rates such as the Australian and New Zealand dollars.
The carry trade is a proxy for risk. Anecdotal evidence from the bursting of the last bubble only a few short months ago -- how quickly memories fade -- had Japanese housewives participating in carry trades, selling yen and buying Aussie dollars, on margin, of course. Naturally, it all ended with tears in the sushi.
There May Be Trouble Ahead
There are still plenty of challenges ahead for the economy. Unemployment, both here in the UK and in the US, is incredibly high, and still rising. Negative equity remains a drag on house prices and on the general economy. Consumer spending is likely to be slow to revive.
My advice is to neither be overly bullish, nor overly bearish. Some commentators seem to think it's plain sailing from here. Plenty of others think the road ahead will be full of twists, turns and potholes.
Placing a bet on either scenario leaves you open to major losses. Instead, it would be better to focus on finding good companies trading at reasonable prices. As a hint, with the added attraction of a decent dividend yield, there's a few of them in the FTSE 100 index right now.
More on the economy and the markets:
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> Bruce Jackson doesn't have an interest in any of the companies mentioned in this article.
