As economy comes back, markets will follow

Hope appears on the economic horizon. A glimmer, to be sure, but hope nonetheless.

The Conference Board, a private research group, said this week that its consumer confidence index rose more in July than economists expected, and was the single-largest gain in a couple of years. Gross domestic product (GDP) for the second quarter was revised sharply upward Thursday, showing that the economy grew a surprisingly strong 3.3 percent.

So, why isn't the stock market, which is supposed to predict recoveries by six months or so, starting to rebound? Market experts tell us there are several trillion bucks in money market and cash accounts, waiting for a reason to chase stocks.

Could it be a lack of trust after a solid year of bad-to-worse news from the bankers that gave us the subprime mortgage crisis and the credit crunch?

"You bet there is investor mistrust," said Phil Grodnick, a 40-year market veteran and senior portfolio manager at Minneapolis Portfolio Management Group. "I don't think risk management entered the mind of some of these financial executives. It wasn't how smart they were but how fat they could get."

But now the folks at the Minneapolis-based Leuthold Group, who tend to be conservative and contrarian, say their latest sampling of the economy, the market and investor attitudes indicates that we're at or near a bottom of the stock cycle.

And they are increasing the stock exposure to their core-growth portfolio from 50 percent to about 65 percent. They never go over 70 percent.

A housing bright spot

Even the dismal housing reports offer some hope. The Standard & Poor's/Case-Shiller U.S. National Home Price Index showed home prices in 20 markets dropping a record 15.4 percent in June compared with the same month a year ago.

But nine of the 20 markets, including the Twin Cities, saw increases from the May 2008 figure.

Grodnick, who manages money with his son, Harrison, dodged the worst of the subprime disaster.

The Minneapolis Portfolio Management Group trimmed financial stocks during the low-interest rate boom that led to financials doubling to nearly 25 percent of the market value of the Standard & Poor's 500.

Over the past decade, the management group's composite portfolio has delivered a 12.9 percent annualized return, vs. about 3 percent for the S&P 500.

"The money manager's charge is to observe, be sensitive to the excesses and avoid them and look for good companies and opportunities," Phil Grodnick said.

Not all of us have enough in the retirement account to hire a private money manager. Many of us cobble together a few bucks every month to plunk into stock funds in our retirement accounts. Some fund managers beat the indexes and some don't.

Small returns are OK

Don't kick yourself over meager returns, particularly if you've invested in low-yielding stock index funds of late. Congratulate yourself for saving something and hope for better times.

This market has been dominated by hedge funds betting against stocks, which generates huge trading volume and volatility.

It's been short-term trading and short-selling over long-term investing.

"When the problems are worked out with the banks and the market is resolved, I think the stock market recovery will be surprisingly strong," Harrison Grodnick said.

Good companies will rebound. The country awaits a new, improved government. The economy will improve.

"There could be more months of decline, we don't know and we don't worry," Phil Grodnick said.