The markets hate uncertainty more than anything. Good news is good news, though there will always be those who worry that it won’t last. The glass is half full for a lot of investors. Then there’s bad news, of which we have a surplus these days. But a funny thing about bad news: at least it is a known, a given. Savvy investors can take into account the variables involved and move on.
It’s uncertainty that kills the markets.
We all "know" the nation is nearly bankrupt, our manufacturing has moved offshore, we are in danger of seeing our credit downgraded and losing the world’s reserve currency status; heck, even our politicians are no longer the best that money can buy. Yet the market moves higher. Just whistling past the graveyard? There may be an element of that among some investors but, no, anyone with a sense of history understands that we’ve been in dire straits before and come through it.
In the Panic of 1907, the Dow fell nearly 50% in one year, the economy fell into a deep recession than this one, and for years thereafter thousands of state and local banks and businesses went bankrupt. During the Depression the ‘official’ unemployment rate was 25% and heaven knows what it really was. The market was so bad that many took their own lives rather than face their clients and creditors.
Then there was the1970s, with a 21% prime rate as some of us were buying our first home, and with a market that fell more than 50% in a steady drip, drip, drip, no-profits-here kind of market. Yet, through it all, the Dow went from 161 in 1942 to a then all-time high of 1051 in 1973. Back at 777 in 1983, we now stand at well above 13,000 – climbing the hackneyed Wall of Worry the entire time.
So what’s changed? We’re still on the road to national bankruptcy, our politicians are spineless, we are indebting our children and grandchildren at an accelerating rate, etc., etc. But now we at least have a slight clearing in our previously-opaque crystal ball. As much as I detest, abhor and despise what over-arching Big Government does to the individual and national character, I take much solace from the fact that it is over and we can now move on.
The markets can live with limousine liberals, bad earnings, even the cyclical and once-in-a-generation secular bear market. What destroys the fiber of the market, and the economy, is uncertainty. Every business in America has been asking…
“Will Obamacare be overturned or upheld?”
“Will the generation that accumulated these debts begin to pay them off or slough them off on our children?”
“Will we fall off the fiscal cliff or kick the can down the road?”
I believe we now know the answer, at least for the next couple years: yes, yes, and ‘down the road.’
As horrid as this is for the future of the country, it at least allows businesses and their workers to now move on and deal with the new realities. As a result, some businesses will hire only part-time employees. (Be careful what you wish for or vote for; you may get it.) Others will slash their own debt rather than pay out dividends. Still others will lobby to change our insane immigration laws to attract young, motivated workers.
But all of us will at least now know that we can, we must, move forward in an environment that may feel like rain, but at least the fog has cleared. Absent that fog, businesses, workers and investors can recognize what we are dealing with and devise strategies to mitigate the worst and accentuate the best. That’s what American businesses, American workers and American investors do. Hence the ray of optimism I see on the other side of the rain: uncertainty yields inaction at best and paralysis at its worst. We can now roll up our sleeves and get back to what we do best.
Will this clearing last? Not forever. It never does. The market rises in fits and starts. This is now the second generational (secular) bear market of my lifetime. I’ve been in the business for 40 years and I can say with certainty that neither of them have been a really good time. On the other hand, we need to remember two things as we construct, preserve and attempt to grow our portfolios:
Bear markets do not move down, down, down. They move down, up, down, up, up down, down up. (Or some variation thereof.) These up moves in a bear market are marvelous times to enjoy the gains they create for us — if only we are willing to recognize that the Bear still lurks and take some money off the table from time to time. They say people have short memories so I will only cite the most recent example: We definitely entered a secular Bear market in 2000. In January of that year the Dow hit 11,723. We are today at 13,435, a gain of 11% or so, not even enough to keep up with inflation and an annual compound rate of less than 1%. And yet, while it fell some 3,500 points from 2000 to 2002, if you had sidestepped even a part of that decline and begun buying in early 2003, you would have seen the Dow roar ahead over 6000 points or so. There are always opportunities, even within the secular Bear.
Bear markets don’t last forever. This one just entered its 14th year. Like all teenagers, it is now at its most unpredictable phase. It could, like so many secular bears before it, end this year, or it could give one last mighty heave and roll over on a lot of people who are today skeptical but with another 500 or 1000 points on the upside will be fighting over the latest dumb IPO.
So what’s it gonna be? Gloom and Doom or Boom and Zoom? I don’t know and neither does anyone else. But the level of pessimism I see all around me, the number of people saying America is all washed up, the number of Gurus saying our problems are insurmountable “this time” all lead me to believe too many people have already exited the building and we should see a nice rally.
Will this rally be the beginning of a new secular Bull market? Ask me in five years when the trend is known. But I know two things right now, today: there are cyclical Bull markets within secular Bears, and no secular Bear lasts forever. We have constructed portfolios that benefit from the emerging markets’ younger populations, lower debt and better prospects, buying companies in the U.S. and abroad that feed these people, clothe them and shelter them. In addition to specific companies, we also own a number of ETFs in the area, like EEM, DEM, and ETF. This is one of our hedges against another bear slide.
We have found some superb income offerings, nothing too flashy or dangerous, but steady slow-growers around the world and even a few in the USA; that’s another hedge against a slide. ALD, ELD, PCY and EMCB have already been very good to us, and I imagine will continue to. And we are also positioned in some companies that have endured their own private hell and are selling at prospects too good and prices too cheap to ignore. And some ETFs in this area would be any of the small-cap ETFs, the holdings of which have been ignored most of 2012: SCHA, VBR, VSS and DLS.
That’s what we all must do when managing our portfolios: be prudent and take Prudent Man risk. Especially when everyone else is skittish, scared or have now locked all their money up in CDs. If indeed we do see another decline, I am 100% convinced that it will not be the end of life on earth as we know it — or even a non-recoverable tumble. I always remember the two things “I know” about secular Bear markets, as noted above, and one piece of advice from investment legend Robert Farrell: “The public buys the most at the top and sells the most at the bottom.”
Finally, for those who are looking for yet one more reason not to enjoy this rally while we can, here’s something to make you feel good about staying out of the market. I look at it, however, and note it is merely a sad chapter in our recent past; it does not have to be our future. When everyone who sees it recoils in disgust and resolves to reverse every one of these unacceptable trends, we will see, with the certainty of historical hindsight, that this period was merely a misguided cul-de-sac from which we yet emerged with our values and our future intact…< >
Chart courtesy of the fictional Tyler Durden at zerohedge.com
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