Newswise — A University of Iowa finance professor says he's cautiously optimistic that U.S. stocks have greater upside potential than they've had recently and that prices have already factored in a lot of bad economic news.
Todd Houge, assistant professor of finance in the Tippie College of Business, points to the fact that despite a long string of bad economic numbers in the past two months, most major stock indices are continuing to trend up from the lows they hit in November.
On Nov. 21, the S&P 500 closed at 740 points and the Dow Jones at 7,400 points. Since then, the government announced gross domestic product has plunged, hundreds of thousands of jobs have been lost, banks and financial institutions struggle despite government efforts at stabilization, mortgage foreclosures continue to climb and Bernie Madoff was revealed to have run a Ponzi scheme of epic proportions, among other bad economic news.
Yet, despite all that, at the close of trading Friday, the S&P 500 sat at 868 points, up 17 percent from its November low, and the Dow Jones was at 8,280 points, up 12 percent from its low.
"That makes me a little optimistic that the market has factored in a lot of bad news already and will continue to climb," he said.
As further evidence, Houge noted that earlier this week, the government announced U.S. GDP had shrunk 3.8 percent in the fourth quarter of 2008, the worst performance in 27 years. Yet, he points out that most market indices opened higher that day despite the news, before falling in later trading.
Houge says the market increases don't necessarily reflect a strong economy today, which he said is in poor shape, and is likely to get poorer. However, he said the upward trends suggest that the markets are taking bad news in stride.
"Consumer and investor sentiment is mostly very negative still," he said. "I do believe, however, that there is a lot of cash sitting on the sidelines waiting to move back into equities at the first signs of an economic turnaround."
RSS