Investment Perspective – Market Commentary
Since the stock market lows set in early March of this year, we’ve experienced a significant run-up in stocks earning back half of the losses surrendered in last year’s crash. The relevant questions that are being voiced now are: what’s behind this move upwards and has the market come too far too fast. With our portfolios, we want to answer these questions and try to be prepared for the near-term while keeping our strategies geared for the long run.
Historically in recoveries from recessions, one-third a stock market's gains are due to businesses "restocking their shelves" and the remaining two-thirds are consumers returning to buy goods. "Restocking the shelves" means businesses in an effort to replenish their inventories (so they can sell what they make) have to buy "parts" from other businesses. Think of a computer maker buying the input goods from other companies in order to produce computers for sale in stores.
This business-to-business activity is indeed economic activity and is in large part what the stock market has reacted to in the early recovery from this recession. In addition to this, the feeling (and reality) that governments worldwide have been doing what’s necessary to stimulate growth has brought us quite a ways from the depths of the stock market decline that bottomed in March.
Going forward the big variable is the consumer – will the consumer return to purchase goods and fuel the remaining two-thirds of the recovery like they historically have done? This is at the crux of where the market stands right now and where we can expect it to go in the near-term.
It will be a long time before the consumer returns to their spending habits pre-crash. As we all know, most are more conscientious with their dollars than before. But with 10% of the nation unemployed, higher rates still of underemployment, add to that a significant slice of workers insecure about their jobs, and further still a lot of people with credit card and home equity lines to pay down, it’s hard to make the case for the consumer returning any time soon to spend.
So where does the stock market go from here? We obviously can’t predict this, but now more than ever I feel a case can be made for multiple directions. The weak consumer struggling to hold on to their jobs and paying down their debt is at the heart of the bearish case in the near-term. Add to this fears that banks are still not in as good a shape as we think, that housing prices may continue to struggle, that commercial property loans may deteriorate and that the level of government deficits could finally push interest rates up crushing a recovery, and a solid case can be made that stocks have moved up too far too fast.
On the other hand, pundits have been saying this since the beginning of the summer (missing a nice rally along the way). This has continued into August with doomsayers predicting that September, consistent with history, would be a terrible month for stocks! This hasn’t happened yet. In fact, there has been a sense for quite a while that many have missed the rally and can’t wait to jump in to the markets the moment they see a slight cutback in prices. This "cash on the street" effect of waiting for a dip to invest in stocks has a levitating effect on stock prices and has kept a pullback in the markets from occurring.
And then there is the very optimistic outlook. As the market continues to move upwards slowly and as each new piece of economic news shows signs of improvement, the stock market could once again pick up momentum and move further upwards. This outlook would have to rely at some point on the consumer actually showing signs of strength and spending at higher levels, but compared to late last year the bar for the consumer may not be set that high. More provocatively, I think there’s a chance as I’ve expressed before that the idea of the "Obama economic miracle" gains traction – that the perception of his leadership (despite vocal detractors) successfully guiding us out of the depths of crisis will catch on and national confidence will improve and power the economy further.
My belief is that we’ll stay on the middle path for a little bit longer, the market continuing to levitate and possibly ease further upwards. At some point, we will grapple with the reality of the still-weak consumer however and need to be prepared for it through cashing in some gains.
In the longer-term, I’m a big proponent of international stock investing and owning shares in huge US multinational companies where a good share of revenues comes from abroad. The US dollar will likely continue to weaken in the long-run which will lift earnings received in foreign currencies.
Furthermore, the level of spending worldwide (printing of money) that’s been necessary to stimulate the global economy will likely lead to inflation and higher interest rates. All the investing that we do in the future will reflect these long-term expectations – inclusion in our portfolios of inflation-linked bonds, commodities-related stocks, precious metals and international stocks from countries with significant natural resources wealth will be keys to successful long-term investing.