No matter what anybody says, no matter what anybody believes and no matter how much anybody feels it should be different, there is no denying the facts. The market is rising and the economy improving. Yes yes, the term “improving” is a relative term but it’s doing better than most believed it could.
Now, I’m not blind. I see our nation’s ballooning debt rivaling that of the finest banana republic, tax rates heading higher and rising unemployment to name just a few, but the facts are the facts. That’s why we are going through the “Great Shakeout” where the markets can rise but the economy will continue to be weak.
The best thing the market has going for is a friendly Federal Reserve. The markets are convinced that the Fed start again on a new round of quantitative easing. The Fed is trying to keep rates low by stepping up bond purchases. This they “hope” will encourage corporations to take advantage of the low rates by stepping up bond issuance to raise cash as a way to increase investment in plant and equipment. This would “presumably” means more production of goods and services, requiring additional workers and enabling the economy to recover.
At the very least, we have the basic ingredients that the markets like:
- “Don’t fight the Fed” – Low interest rates
- “Don’t fight the tape” – Good corporate earnings
Nobody ever said this was going to be easy. The last 18 months have been not only a test of investors’ patience and heart strength. Yet, despite all of the forecasts of imminent disaster, stocks and bonds have put in a decent performance. This goes to show you that regardless of these incredibly confusing times, it is important to not get caught up in all the hoopla and news hype and to be guided by unbiased, objective data. This is incredibly difficult for any investor, including professionals. That’s why the good advisor make the big bucks, and the best ones are invited to share their views on TV and in the media.
Of course, there are many economic problems still to be overcome. However, investors do not buy stocks because of today’s news but rather because of what they think the news will be in 6-18 months from now. Therefore, by the time the economic news turns positive, stocks are always higher and most investors are left in the dust wondering what the heck is going on.
Investors need to manage risk, not avoid it. This new round of easing will keep life in the markets a little longer, but investors must be alert. There will be a time in the near future when these obstacles will become too much to bear and a crisis of confidence arises. Therefore investors need to invest in the sweet spot in the markets as discussed in my investment strategy, but be prepared to act quickly with their exit strategy.