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MAKING CENTS OUT OF THE NEWS
Blog #38
(November 17th, 2011)
“Lurching” from Pillar to Post
By Tom McAllister, CFP®
The most appropriate descriptive term for the “gait” of investment markets this year might be “lurching.” With 1-3% daily moves common in stock and bond markets, investors are right to ask “What is going on?” The answer, I believe, lies in a combination of factors.
1. Deficits. The United States has had runaway deficits for the past three years, as the administration and its Congressional allies have tried to “spend us out of trouble.” It is no surprise to me that this strategy, which never worked in the past in any country, is not working here now. Our leaders, unfortunately, seem to learn little from the past, chasing the same rainbows as our European trading partners did in the past.
2. Overreaction to events in Europe. We are, of course, closely linked to the European democracies, as well as those in Asia. I would suggest however, that there seems to be a lot of overreacting in our markets. As one example, the Gross National Product of Greece could disappear altogether without causing much
of a hiccup in our U.S. economy. What seems to be happening is a fear of a domino effect causing widespread economic chaos throughout Europe. While I would submit this is an unlikely scenario, U.S. investor “skittishness” is understandable, and is affecting our stock and bond markets.
3. Short-term trading in stocks. These days, short term trading accounts for more than half of our market volume. In addition to the activities of hedge funds, which has multiplied in recent years, there are many computerized arbitrage programs operating almost autonomously each day. The number of professional day traders has grown a great deal, while the number of individual day traders has moderated. Short term traders, by definition, react immediately to bad news. Whether a riot in Athens, a need to pay higher interest rates to move an auction of Italian government debt; or a change of leadership is happening, short term traders will move assets to cash while they wait for the situation to become clear.
If we step away from a short-term view of events, I believe, we see another picture. Corporate profits are strong, cash on hand is at record levels, and stock prices are quite reasonable on an historic basis. No less an authority than Warren Buffet is demonstrating this is so. The latest of Buffet’s moves to take large positions in blue chip stocks was announced this week – a greater than 5% accumulation of IBM shares.
Buffet, I remind you, is no short term trader; instead, he accumulates shares with a view toward a permanent, or at least a very long-term holding. Since SEC rules require anyone accumulating more than five percent of the outstanding stock in a publicly traded company to disclose their position, we can have the benefit of Buffets obvious faith in the U.S. economy’s future.
So where does all this lurching and logic leave us? Still uncomfortable, I suppose, but, hopefully taking a long term view of the markets. History shows that moving in and out of the stock market in response to short term concerns can destroy long term returns on our portfolios. Too close an attention to current price is not conducive to sleeping well. Best, I believe, to stay the course, monitoring our portfolios quarterly or semi-annually, and allowing others to be overly concerned about Europe’s troubles.
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