May, 2012

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Politics, Reality, and the Markets

 

Clients can’t help but have concerns this year. Will Greece self destruct? Will Spain be the next to fall? Will the EuroZone Collapse? Will we enter into a double dip recession? Will the current Facebook flop further erode confidence in Wall Street? Is volatility beginning to creep back into the equation and will we return to the roller coaster ride that was 2011. And, depending on your political persuasion and beliefs, won’t the election of Obama/Romney end the world as we know it?

These are all good questions. The market, has for the past several years, “climbed a wall of worry” and we certainly still have worries to climb! Here is an interesting chart forecasting some of the projected results from Greece leaving the Euro Zone in an isolated fashion.

Scenario: Greece Exits Euro In Isolation

These results are forecasts from Hidden Levers, Inc. The interesting thing here is that the response is fairly muted. Other than silver dropping, we could all survive these small impacts without losing much sleep. Yes, turn on your TV and you may think the world will end if Greece fails. As to the Presidential election and its effects, I don’t really see any reason to think that one person will be able to affect the results in anything close to the alternately wonderful or disastrous way that many suspect.  The market has done fairly well under President Obama and we have had a very slow, very tepid improvement during these years.  My belief is that a tepid improvement is still the most likely result moving forward. A red hot recovery does not seem to be in the cards and I would likely think we should all run for the hills if we see one (I suspect such an economic recovery will be unsustainable and we may find ourselves back in a deep hole). Can Mitt Romney change our fortunes and prospects in a profound manner that will be a game changer for all investors? Filtering out the emotional impact of these political decisions, I would say that the results of the election will not change our economy in profound ways.

This leads us back to fundamentals. If we can purchase quality investments that generate income as an intermediate to long term investment, we think that makes sense. We don’t find this market to be extremely cheap nor do we feel that prices will soar in the next few years. However, we feel there are prudent investments to make at this time to give you a reasonable return above the rate of inflation going forward. For the conservative investor (the “tortoise”), there are opportunities to make gains over the next few years and continue to slowly compound your investment returns. Compounding is, of course, the eighth wonder of the world. It will remain that for a very long time!