August 2009

Alongside Virtue

The market and the Administration are each banking on the resurgence of the “consumer” to liquidate languishing business inventories in order to spur economic growth and employment. Using a “carrot on a stick” approach to coax the consumer back into the stores, the government offered such programs as the “Cars for Clunkers”, and there are plans to assist other durable goods sectors of the economy in coming weeks. These targeted efforts by the Government offer only temporary stimulus to the economy and, as many argue, may actually take away from future sales thus contributing no real net gain to long-term economic growth. Many potential consumers may stay on the sidelines this time around, in contrast to previous economic recoveries. Excessive debt, a change in attitude toward financial security and savings, fear of loss of future income and lack of job security, together with reduced credit availability are strong headwinds pushing against the consumer-led economy. With tight credit and little savings to draw upon, scores of small businesses continue to shut their doors, resulting in continued loss of jobs as well.

Stock markets have retraced approximately one-third of their loss since beginning in late 2007. Still, investing in today’s market is similar to walking on ice for the first time … one cautious step after another. The lack of substantial trading volume that has accompanied the market recovery is worrisome in that “smart money” (if you’ll pardon the expression), as in the big players, has yet to enter the market en masse. Given light trading volumes, it appears that either the individual investor is pushing stock prices higher or larger players are very gradually exiting the fixed-income market and entering equities at a less than robust pace. We suspect that a portion of the market gains from the lows experienced in March, and perhaps further gains to come, may be an effort by some investors to convert increasingly worthless paper dollars into more tangible assets that at least offer a better chance of maintaining purchasing power than does the U.S. dollar.

We do not know where the stock market will be tomorrow, next week or even next year – no one does – although, it is reasonable to expect some profit-taking in the near term, given the speed at which the market has moved up of late. None-the-less, it is important to maintain a long-term perspective on investing so as not to get caught in the volatile ups and downs of market swings. Mainstream media continues to encourage a trading-like mentality to investing – perhaps, only to justify their own jobs. Gone are the days when saving money and investing for the future were a consistent and collective goal. As if fighting for a place alongside virtue, speculation is encroaching into the mindset of our daily lives and threatening the security of our future. In order to reduce the risks of capital loss, we stress investment diversification, and a focus on companies that offer sound balance sheets, growth within their respective industries, and attractive dividend payments. We also recommend “dollar-cost-averaging” into specific securities to avoid the risks inherent in market timing.

Corporate growth in the U.S. is likely to be slower going forward as de-leveraging works its way through the economy. We believe, as some others do, that growth within Asia and parts of Latin America will continue to surpass that of more developed countries, in particular the U.S., during the foreseeable years ahead as these areas of the world move from strictly export-led economies to a mix of exports, domestic growth and infrastructure build.