Confidence Confidence Confidence
We know that confidence will play a major role in investors returning to the market. Once the credit markets unlock from the paralyzed state that they have been in, stock prices will react positively. But we may need more than a resolution to the immediate problems before a new bull market can take hold.
My thoughts on the market improving in any meaningful way:
With everything ratcheting down, p.e. ratios will be established at lower levels to accommodate a lower potential growth rate.
With less leverage comes less lending activity.
Less lending activity leads to less expansion and entrepreneurial investment.
Falling home values and lower product demand worldwide continue to put downward pressure on employment and constrain economies.
Earnings growth will be challenged.
Where will beta come from, particularly at the financial institutions? (Beta is earnings above the average.)
We will have rallies, good news rallies and short covering rallies, but it may take a revival of growth in the Bric countries and other developing countries before we can see a sustained upward movement.
Will the Bric and other developing countries be able to ramp up to double digit growth without the U.S. markets first gaining traction? This we don't know.