The hardest thing about investing is removing the emotion. How many times have we gotten in our own way of success and ignored the facts due to a “feeling” or because wanted to feel a certain way? That’s where we are today with the economy and the market, and why it’s so important to see the forest for the trees.
Often times, when we look at a forest it can be an intimidating and dangerous place that no one in their right mind would enter. There could be scary animals, blood sucking bugs and ROUS’s (rodents of unusual size). Oh my! Well right now, the forest is definitely the economy with the animals being the bad economy, the blood sucking bugs obviously the investment bankers and the ROUS’s our memory of being burnt by two bear markets in just a few years.
However when we look closer, we start to see lots of pretty colorful trees that are growing strong and full of life. Those trees of course, are many of the individual companies. Despite the horrendous economy, many companies are doing quite well and the major indices are expected to post record earnings.
How can this be? Quite simply these companies have started to generate output, or the supply of goods and services, that actually meets demand. Imagine that, only making enough product that people actually want. To do so, these companies have become lean and mean, reducing waste. This unfortunately includes laying off unneeded workers, which only perpetuates the economic malaise.
That’s how you get a bad economy and a good stock market, or as I’ve coined it, “The Great Shakeout“.
Of course, this can’t last forever. Companies will eventually need to find new customers in scale, which is not happening anytime soon. The demographics of an aging population spending less combined with an over-indebted population out of spending power will see to that.
However, the absence of inflation (at the moment) will allow the Fed to feel empowered to embark on a new round of government stimulus, which seems to be on the way. How they feel more easing will help is beyond me. Banks aren’t lending because people don’t need more debt and the ones that do are not credit worthy. I doubt we really want banks to lower their standards again. That what killed us last time. On the other side, businesses don’t want to borrow because of the uncertainly, so cheap money won’t change anything. Companies don’t need more credit, they need more customers!
Yet, further easing will definitely further prop up the economy and keep stocks from collapsing…for now. Eventually, investors will need to be completely out of risk assets, so keep your exit strategy at the ready. There are plenty of low risk places to make money in this market, you just have to find the sweet spot.