A few weeks ago I was on the floor of the New York Stock Exchange for CNBC and ran into my old friend Art Cashin. Art is a pro’s pro and a wily veteran of over 40 years experience. When I asked him about current market levels, he said, “Mike, I feel like I did when I sold the NASDAQ at 3,000.”
The NASDAQ soared to 5,100 during the dot-com boom and has never returned. Today it is around 2,150. Art made a good sale for all of the right reasons, and though he missed the ensuing 2,000 points of upside, he still looks pretty smart.
If equity markets are being driven by artificial stimulus, then, following the law of physics about objects in motion, they should continue to be driven as long as the stimulus is applied. The ugly question is: how long can it last? Perhaps an uglier question is: at what consequence? Art Cashin knows that excess can become excessive. Benjamin Graham said that ‘markets can remain irrational longer than you can remain solvent.”
In the end, I have no idea how high the flames of this market surge may be fanned. I know that when the music stops, many will be desperate for a chair. The Federal Reserve officials are holding out hope for a fairy-tale ending: that consumer demand will return at a steadily increasing pace, so they will be able to withdraw the artificial liquidity at a steadily decreasing pace. The hope is that the economy will continue to grow modestly without any significant inflation and without disruption to the equity markets. We hope so too, but our investment discipline requires a more substantial architecture than hope.
Therefore, we think investors should look to larger, more conservative blue-chip companies and be prepared to miss out on part of the near-term surges rather than risk the round-trip volatility of riskier asset classes. Blue-chips should offer better performance and downside protection over the long-term. Bond investors would be prudent to accept the lower yielding, less exciting returns from shorter-term maturities and eschew the more volatile long bonds.
The financial world has endured great trauma. There is money to be made to be sure, but a dogged, disciplined approach is more important than ever.
Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.