Last week, the Dow Jones industrial average swung like a violent pendulum, gaining or losing hundreds of points by the day. As of Monday morning, stocks are on the rise, thanks, in part, to unexpectedly positive news about Japan's economic growth. Still, given the market's volatility of late, analysts can't decided if investors should go on a bargain-hunting buying spree or stuff the money under the mattress. Is now really a good time to buy?
Yes, stocks are trading below earnings: It's still a great time to buy, says Andrew Bary at Barron's. Sure, "stocks went on an extraordinary ride last week," but after the dust settled, the losses weren't so bad. Stocks are trading cheaply relative to earnings, and while some worry that corporate profits may be on the decline, other analysts contend that they should remain fairly strong. "They've taken a beating lately, but quality stocks, helped by historically low interest rates, are appealing."
No, earnings are likely to fall given the weak economy: Sure, "the market selloff in recent weeks has made stocks appear very cheap," but they might not be such a bargain, says Jonathan Cheng in The Wall Street Journal. Some analysts contend that earnings won't remain strong. Given the crisis in Europe, U.S. deficit woes, and the weak state of the economy, both optimism and profit expectations should be tempered. "There's a higher probability that things are bad than that things are great," says Adam Parker, a chief U.S. equity strategist for Morgan Stanley, as quoted in the same article. In the next six months, we're likely to see stock prices continue to decline.
"The Other Shoe — earnings"
But stocks can do well even if the U.S. economy is doing poorly: "The U.S. stock market and the U.S. economy are increasingly unrelated," says Robert Doll, a chief equity strategist at BlackRock, as quoted by the Associated Press. Increasingly, a number of U.S. companies are making money abroad, so even if our economy remains weak, stocks could do fairly well. "If the U.S. economy is muddling through, the stock market can certainly rise significantly."
"After a wild week for stocks, what to do?"
THE WEEK'S AUDIOPHILE PODCASTS: LISTEN SMARTER
- 43 TV shows to watch in 2014
- The latent sexism of the male marriage proposal
- Bush vs. Clinton in 2016 is the perfect way to make millennials hate politics even more
- This judge is the reason we're still fighting over net neutrality
- How to be the most productive person in your office — and still get home by 5:30 p.m.
- The week's best photojournalism
- Is it now OK to have sex with animals?
- The lessons of Japan's latest recession
- What would a U.S.-Russia war look like?
- The hilarious hypocrisy of Republicans complaining about the imperial presidency
Subscribe to the Week