Posted At : February 8, 2010 10:29 AM
Invest with your head – not your heart
Like it or not, the market is strong (aside from normal corrections) because the economy is improving. Practically everyone feels that the economy is inherently weak and the stock market advance is a mirage and essentially, as a friend recently commented, a game of Jenga. However it is absolutely critical that investors put aside the emotion and invest with their head, not their heart.
On the emotional side, I feel it too. As a nation, things look bleak with rising unemployment and a national debt that would make a banana republic proud. This is evident in the AAII sentiment #’s where the # of bullish individual investors dropped to 40% from 46% last week. Put simply, the individual investor is almost always wrong.
The fact of the matter is that the economy is improving. Remember, the The Stock Market loves 2 things:
2. Low Rates
It doesn’t matter where the money comes from or if it’s sustainable, in this case the government. It just knows it’s out there. And, although no one believes it is currently sustainable, the market can rally for months or even years before we have to pay the piper. We had a 3 year bear market rally from 2003-2006, even though in hindsight the proof was evident that we shouldn’t have.
And the positive reports are there.
1. GDP was very strong last week. Yes I realize that it was largely inventory rebuilding (60% from 7% last quarter) and that the stimulus accounted for a large part of it.
2. ISM Manufacturing – The manufacturing sector grew for the sixth consecutive month in January as the PMI rose to 58.4 percent, its highest reading since August 2004
3. ISM Non-Manufacturing – registered 50.5 percent in January, 0.7 percentage point higher than the seasonally adjusted 49.8 percent registered in December, indicating growth
4. ADP Jobless #’s were less than expected and unemployment is a lagging indicator
I don’t need to understand the biological process of photosynthesis and how it converts carbon dioxide into organic compounds using the energy from sunlight to enjoy the flowers in my garden.
Naturally the tide can and will change on a dime, so your financial plan needs to be able to take advantage of what the market gives when it gives it and, as importantly, to have a definite exit strategy.
Regards – Keith Springer
President of Springer Financial Advisors