9 Reasons to Buy Stocks in The Downturn

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Here are 9 Reasons to Buy Stocks in The Downturnre are the 9 reasons I’m buying stocks for both myself and my clients.

  1. Low oil prices are a transfer of wealth. – It’s important to remember that the crash in oil prices is not so much destruction of wealth as it is the transfer of wealth. What used to be a dollar in the pocket of oil producers and oil exporting countries is now a dollar in the pocket of an oil user and oil importing countries. Wealth is not being destroyed, it is simply transferred. Will there be energy companies that go bankrupt? Absolutely. Will there be some banks that run into trouble with bad loans? Of course. Will there be layoffs in the industry? Yes. But all that pain will be balanced by gains elsewhere in the economy.

  2. U.S. consumers will benefit. – The U.S. economy is roughly 70% consumption based (compared to about 1% oil and gas production) and U.S. consumers are getting huge savings. I remember back in 2010 and 2011 as oil prices rose towards $120/bbl listening to the conference calls of consumer companies and hearing the executives lament the effects higher gas prices were having on consumer budgets. At current oil prices, the average American household is saving over $1,000 per year in gas costs, and even more when the effects of other savings such as lower heating oil is factored in.

  3. The crash in oil is due to speculation and deregulation. – The sharp selloff in oil is certainly due to some real economic issues. Demand for raw materials in China is decreasing and there is a legitimate supply glut as OPEC and U.S. shale oil producers continue to pump oil. Let’s not forget Iran’s production coming to market soon as well.

  4. The end of austerity in the U.S. – Over the past four years, sequestration and budget cuts have meant the government sector has been a drag on the economy. Budget cuts and tax increases cost the economy almost one million government jobs lost and subtracted around 3.5% (perhaps even more) of cumulative GDP growth from the economy.

  5. The budget deficit is set to grow. – For the first time since the financial crisis, the U.S. budget deficit is set to increase. The CBO is projecting the budget deficit for 2016 will be 2.9%. This is 2.9% of net financial assets the government sector will be adding to the private sector economy. Just as the massive stimulus spending and budget deficits supported growth and the recovery after the financial crisis, we should see the same fiscal benefit albeit on a much smaller scale. While conventional wisdom is that deficits are bad.

  6. U.S. household debt service is at historic low. – The U.S. consumer is in about as good a financial situation as they have been in during the last few decades. There is plenty of runway available for a consumer credit led expansion before debt service ratios reached worrisome levels. Additionally, low debt service levels cast some doubt on the common mantra that consumers will be spending their gas savings primarily on paying down debt. Furthermore, a consumer credit expansion isn’t the only thing that could drive an economic expansion.

  7. Housing starts still below average. – Despite recovering from the recession, new housing starts are still running below average and not keeping pace with household formation. There is plenty of headroom for residential construction to increase before reaching the level of a housing bubble.

  8. Stocks are cheap – S&P 500 forward P/E is below average. – With today’s market rout, the S&P 500 forward earnings multiple is 14.9, solidly below its 25 year average of 16.5. We have strong job growth, low inflation, the prospect of years of housing led growth, consumer debt service ratios at modern era lows, increased government spending and tax cuts, and still low interest rates. I’d say you’d be crazy not to invest in American businesses at these prices. A good economic outlook and below average prices on stocks should make for good returns in the coming years.

  9. China isn’t as important as people think. – What about China? While China is certainly a large economy and what happens in China can affect economies around the world, let’s keep a few things in perspective. First, China grew at an annualized pace of 6.8% last quarter and 6.9% for the year. Is growth slowing in China? Yes. But, it has been slowing for many years now and 6.9% growth is hardly anywhere near a recession or even a hard landing.

The U.S. is probably one of the most insulated economies from China. China is not a very large export market for the U.S. and only about 5% to 7% of the revenue of S&P 500 companies comes from China. That’s it. As long as China doesn’t explode into a ball of fire tomorrow and can maintain some semblance of growth, we are talking about 5% to 7% of the stock market revenue that is at stake. Hardly the reason to justify a panicked sell off of U.S. corporations.

Source: Forbes


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