The dark miasma of pessimism that sent stock prices tumbling is obscuring powerful and far-reaching trends that could propel the market higher, much higher, in 2008 and beyond, even though the markets are likely to continue to test us with increased volatility and declines in the near term. There are compelling reasons to believe we are moving out of trouble, and not further in, hence our optimism and enthusiasm for U.S. stocks and our view that this turbulence, in retrospect, will prove an extraordinary opportunity for long term investors.
First, this is a real slump no matter how you work the numbers. Two-thirds of us believe we are already in a recession. The abuses in sub-prime lending have resulted in nearly $100 billion of financial write-downs and losses so far, and for all intents and purposes choked off the credit markets. The housing market is moribund, with foreclosures reaching crisis levels in many U.S. cities.
Job growth is slowing noticeably, and oil prices are near $100 a barrel. The Fed has already dropped its key interest rate twice in January, yet inflationary pressures and a declining dollar may hamper future Fed policy options. The situation in Iraq, greatly improved from this time last year, is still fragile; and the improvement has had little positive impact on financial markets.
AN APPROPRIATE INVESTMENT STRATEGY
First, your asset allocation, which has apportioned your portfolio among stocks, bonds and cash based upon your unique circumstances, is and continues to be your best risk management tool. In the past 60 years, there have been 18 times when, amidst overwhelming pessimism, the market has fallen more than 10 percent. On average, stock markets recovered in only six months from these slumps.
IRAQ AND THE POST WAR BOOM
The war in Iraq has already lasted longer than the United States’ involvement in World War II. By any measure we are approaching an end game. We believe we will ultimately prevail, and the resources and footing that are necessary in a war-time environment will recycle back into our economy. The impact on growth and productivity will be profound, and it won’t be long before the financial markets, which anticipate events, will begin to pick up on this. While the economic phenomenon of a post war boom is complex and the result of many factors, it has been seminal after almost every major conflict. There’s little reason to think that this time will be different.
If the 1990’s brought access to massive amounts of data and the Internet to computers, we are now looking at the next wave of innovation, as this all becomes accessible to us in mobile format. Information transfer, commerce and social communication will all undergo a revolutionary change. The effects will stimulate and transform the economic and social sphere, as well as medicine, healthcare, politics, employment and productivity. The effects on financial markets will be broad and positive.
GLOBAL CLIMATE CHANGE
This is now a serious problem, yet the potential for growth and innovation as we search for alternate strategies and solutions is likely to become a major global stimulus for economies, especially technologically advanced ones like the U.S. The impact of this global effort will be transformative, and will be an enormous boon for financial markets.
Since 1776, we have experienced multiple waves of immigration. The economic and social challenges of absorption were no less difficult and divisive then than now. Yet despite this, each successive wave of immigrants has revitalized and transformed our economy and our social structure for the better. This is one of the most bullish factors for the next decade, and the extremes of emotion that color our debate now will fade into obscurity just as they have in the past. The economic impact of the current change in our demographics will be far reaching, and on balance an extraordinary positive for investors.
There are many pitfalls along the way, to be sure. Strong growth carries with it the risk of rising inflation. A strengthening dollar can contribute to comparatively muted returns on international investments, much lower and closer to historical averages than we have been used to. Higher interest rates and moderate inflation could ultimately raise the rate of return on safe investments, and lower slightly expectations for returns from equity markets. But investors will do more than prosper. The current environment of volatility and uncertainty offers clear opportunity for those with a longer time frame, patience and resolve.
Steven Weber and Elizabeth Loda are investment advisors for the Bedminster Group, a fee-only advisor providing investment and financial counsel to clients in the Lowcountry since 1997. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. In addition, this is not a solicitation to buy or sell any securities. Furthermore, the opinions expressed are solely those of the author and do not necessarily reflect those from any other source.