During August I spoke with a investment manager who happens to be a friend of mine. He told me he couldn't remember a time when he was so right about the overall macroeconomic data yet couldn't figure out the direction of stocks and bonds. We talked for some time and I told him that it is important to remember that you typically can't make sound investment decisions strictly based on economic data. In the real economy, things are bad and will likely get worse for the foreseeable future. However, stocks don't always move with the economy.
Stocks move up or down based on current earnings and (this is important) the future expectation of earnings growth. While the economy can be mired in a slow down for many months, the stock market can move higher, seemingly defying forecasters as the economic data points remain weak, while earnings continue to grow.
The time for being overly negative about the economy has likely passed. It's time to adjust to the new reality and prepare for the future environment.
The reality is that no one knows for sure when companies will begin hiring again or when the housing market will turn around or when consumers will begin spending again. However, we have endured a terrible domestic stock market over the past decade and everyone in the media, as well as economists and strategists continue to paint a bleak picture. It is at times like these, when everyone is very pessimistic, to begin thinking from a contrarian perspective - emphasis on "thinking."
Make no mistake, we are not advocating allocating 100% into stocks. We believe the domestic economy has a lot of issues and there are still concerns about government debt in Europe. Of course, one negative news event and we could see lower prices in the markets.
However, most people have adjusted to this and are either completely out of financial markets or are completely in bonds.
What we are experiencing now is the polar opposite of the bullishness and euphoria prior to the debt crisis and real estate collapse. Only time will tell, but the pessimism seems to be deep and entrenched. While this negative sentiment could continue for some time, eventually it will break, the economy will improve, and markets will move higher. The key is in the timing - will this happen next month, sometime next year, or a few years from now?
Our prediction is it could be the latter, but that doesn't mean there will not be opportunities. We expect certain stocks, sectors, and overseas markets to outperform the broad US market indices over the next several years. From a big picture perspective, we want to think about the right time to begin deploying capital into these areas over the next few years, taking an opportunistic approach, and taking advantage of any volatility in the markets. Big opportunities come from acting against the crowd, not with them.
We still want to err on the side of protecting capital, but as time goes on we want to be less bearish and more opportunistic.
