Yes the stock markets around the world have negatively reacted to the problems in Europe and have given back some of their gains over the last several weeks.The concern is that if some European countries actually take dramatic actions to cut spending, increase taxes, etc. then, that will lead to long economic slumps for those countries. In addition, one U.S. Federal Reserve official noted that if the debt crisis overseas curbed lending and the flow of credit globally, that would endanger both the U.S. and global recoveries.
Offsetting some the recent market downturn is the following good news:
- Inflation is at a 44-year low, is still benign and not currently a threat.
- Dell and Fortune Brands issued positive earnings reports yesterday. Dell noted that companies are buying computers and Fortune Brands maker of faucets, windows, cabinets is seeing some rebound in home improvement items.
Amazingly, up until approximately three weeks ago, you could have thrown any bad news at the stock market and it would shrug it off and continue to climb. This month, most good news is being ignored.
What we may see coming out of all this recent market volatility is a test of wills. How will investors react? Will there be an overreaction like what occurred in late fall of 2008 through the beginning March of 2009? Or, will investors sit tight and ride it out and even look for buying opportunities?
Are there challenges and opportunities ahead for Europeans and Americans? Yes, but there always have been. However, institutions and individuals around the world are now realizing and voicing their opinion that some countries have overspent and are having a tough time paying back their debt, and in some cases may not be able to. This situation is causing economic pain to all involved (i.e., foreign government currencies, their citizens and investors).
That being said; just ask yourself, will McDonalds, Wal-Mart, Sony, GE, Bank America, Nestle, Garmin, Honda, Apple, Intel, Prudential and Berkshire Hathaway all cease to exist? No! The real question is how will investors react? The upcoming days, weeks, months and years for investors may be a test of wills. Will they or won’t they panic, find investment opportunities, ride it out or throw in the towel?
I am not downplaying the decline we’ve seen in our client and our personal portfolios. However, I am choosing to take the stance that a market correction of 10% – 20% should not be shocker. Also, the majority of our clients are not anywhere near invested 100% in stocks. Thus, their accounts will not experience the same volatility as we’ve seen in the market.
Many U.S. corporations, businesses and Americans learned from this past recession and have become much more prudent with their finances. The real silver lining to this recent market volatility will be if political leaders in the U.S. and in other countries get a wakeup call. If they realize that if they don’t take the current events seriously, then their currencies, economies, domestic businesses and citizens will suffer for many years to come. If they do respond to this “wakeup call,” then the political leaders will begin to implement policies that will reduce spending and allow their economies to grow, which will actually increase taxes paid over the long run.
Investors are drawn to predictability and stability, and that is something that may be in short supply in the short-term. However, our investment strategies are not predicated on what may occur over the next several days, weeks or months, but over the next several years. Thus, I do not see the recent market correction or headlines as a game changer, but just part of the normal ebb and flows of the market and economic cycles.
Outside of an act of God, I can assure you McDonalds and all the other companies I mentioned previously will all be open for business, and the sun will again rise in the east and set in the west. We just may experience a period of stormy market and economic conditions before we see truly sunnier days. If we learned anything from the last bear market, it was patience = profits and panic = losses.
Twisting the tale
The U.S. Labor Department this week issued two separate reports on the unemployment situation in the United States. Ironically, if you read the following two articles (see links below); you’ll see two completely different outlooks for employment and the impact on the U.S. economy. This is just an example of how you take similar data and give very different observations or opinions on it:
http://finance.yahoo.com/news/Jobless-rates-drop-in-34-apf-3586211343.html/print?x=0
Quotes
“Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack…The key to making money in stocks is not to get scared out of them.”
Peter Lynch, legendary fund manager
“Our favorite holding period is forever…I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
Warren Buffet, founder of Berkshire Hathaway
“Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and, almost invariably, abandon it at precisely the wrong time.”
David Dreman, institutional value investor
“The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.”
John Templeton, famous value and international investment manager
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
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The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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