This situation applies to individual equities as well, although in a much greater magnitude. The classic example right now is Apple Inc. (NASDAQ:AAPL), which has seen shares pullback more than 30% from last year’s highs. How many articles highlighted the attractiveness of the stock as it was soaring to a market capitalization of $650 billion? A lot. With a ton of Wall Street coverage, over 85% of the analysts had a buy rating on the stock. Similar feelings were echoed by the general public as well. This could be a big factor is the recent pullback of the stock, but is not a reason for long-term holders to exist their position. In fact, this bullishness by the sell-side was fairly constant as the stock doubled from $350 to $700. Blindly following high sentiment readings would have prevented investors from owing one of the best performing stocks of the last decade. Long-term investors should maintain the course on Apple given its competitive position, future growth opportunities, and attractive valuation.
For those looking to capitalize on a stock that has been shunned amid near-term struggles should look to Hospira, Inc. (NYSE:HSP). A year ago I recommended investors hold off as the uncertainty was likely to linger. This was a good decision as the stock has underperformed the S&P 500 by 16%. The company has since made vast operational improvements as it seeks to please the FDA. It hasn’t gotten final approval for its key Rocky Mount facility just yet, but hopes to do so in the first quarter of 2013. Costs related to fixing highly complicated quality control processes have dented near-term earnings, but the company maintains strong competitive advantages as the market leader in generic injectables and the number two player in infusion pumps. A revisit to 2010 stock price highs would yield investors a return of nearly 75%.
Are We in a Secular Bull?
It is true that the market is due for a pullback given that it has been more than 325 days since a 10% correction. This is TWICE as long as normal. However, according to Ned Davis Research advances without a 10% pullback have lasted an average of 330 days WHEN IN A SECULAR BULL MARKET. Either way, it is likely that the market will encounter a pullback of 10% at some point this year. The reason to not try and time this is because if we are in a secular bull market then we are only in the fifth inning based on the historical median length of secular bulls. Unfortunately, it isn’t easy to classify these periods as they are evolving. Market valuation, demographics, average asset allocation, and several technical indicators all lend to the idea that a secular bull market is underway.
If true, then reducing fixed income allocations in favor of equities makes sense. Those that favor ETF investing may opt for the mid-cap space via SPDR S&P 400 ETF instead of the blue chips of the Dow Jones Industrial Average. Mid-caps and small-caps historically outperform large-caps during secular bull markets.
The Foolish Bottom Line
Don’t be whipsawed by the daily economic indicators; focus on the trends instead. The economy remains on much firmer ground as housing and business capital expenditures start bouncing off rock-bottom levels. This trend will likely persist for years with equity markets in a new secular bull market. Staying the course and not being scared by headlines remains the prudent course of action as the bears slowly capitulate- adding further impetus to the secular bull market.
The article The U.S. Economy Contracts! What Now? originally appeared on Fool.com and is written by Justin Carley.
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