Yoshikami: Why Stocks Likely Won't Fall 20%

In the investment strategist world, I tend to be pretty cautious.

I do believe that while economies are recovering, it's going to be a long difficult climb from years of excesses.

I'm concerned about deficits, excess regulation, high unemployment, and hangover from bad decisions by consumers and businesses.

Still, I believe that recovery, though weak, is occurring. And I believe market psychology is much improved from March of 2009.

I was just reading an opinion on CNBC.com by respected economist Nouriel Roubini, alias Dr. Doom, that said that he believes stocks will fall 20% from current levels.

While that's possible, it's my view that this is unlikely and here's why.

- The banking system is struggling and is not anywhere near as fragile as it once was. Capital ratios are better than they've been in years and the real estate sector is hinting that stabilization is here. While banks like Wells Fargo and Bank of America are still limping, they are showing signs of turning the corner. Confidence is greater than it was 15 months ago that the financial sector is beginning to heal.

- In March of 2009 consumers and investors believed that a depression was sure to occur and priced securities and other assets at appropriate levels for a dire outcome. There aren't many strategists who now believe that depression is in the wings. While I tend to be more negative than most and believe that the economy will struggle for a significant period of time, I do not believe economic collapse is at hand. The economy continues to churn out signs that recovery is beginning.

- Europe's problems are significant but actions taken by the European Central Bank led by Jean-Claude Trichet seem to be restoring some stability to the European Union.

The commitment of $1.1 trillion and other measures by the European Union to halt a sovereign debt crisis has lessened panic. While the euro remains weak, it is not yet dead (though that outcome certainly is possible). There are strong economies in Europe that will be burdened by problem countries and that will sap economic growth; but not kill it. It's my expectation that economic growth will be damaged for a significant period of time but I do not expect continental collapse.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

- China's growth is slowing but in all likelihood will still be a driver for global economic activity. Anyone who has been in China lately can clearly see this is a country on the rise with a growing consumer middle-class. And like other consumers around the world, growing affluence results in growing spending. True, economic growth may not be at 15 percent per year but even a 8 percent growth rate this still qualifies as a growth story; a growth story companies like McDonald's and General Electric have noted in recent earnings calls. Other Asian economies recently reported solid growth in the first quarter of this year; Korea with 7.8 percent and Singapore at 7.2 percent. Economic strength in Asia, will aid the global economy. It won’t fix problems but it will help recovery.

- Inflation remains in check and the threat of higher interest rates is not currently present. The low cost of money will help both consumers and businesses recover from the great recession of 2008. If inflation kicks up this is a different story but at this point that has not been the case.

Like you, I read with interest opinions and stories about what might happen and intellectually digesting these perspectives is critical. Considering disparate views is wise.

But here's my perspective on how to read these stories.

Don't assume that because something might happen, it will.

Don't assume anyone's opinion (including mine) is truth of a predestined outcome. These are merely opinions to consume with skepticism and a balanced perspective. Invest on the assumption that any outcome can occur and you will avoid the fate of many investors who become far too euphoric or overly pessimistic.

As is usually the case, dogmatic thinking when investing usually leads to a huge win or huge loss.

And remember; conditions change and you must be flexible as the world morphs.

Don’t be permanently wedded to your initial views if they seem out of touch with current economic realities. As I have said in previous blogs; constantly reassess your views and recheck your arguments. Self re-examination is critical.

The goal of an investment strategy should be to hold onto a balanced perspective and invest so that your investment plan is survivable in case the unlikely occurs. Don't ignore fear but don't be a slave to it. Instead use it as a cautionary guide as you invest. Likewise, be wary of euphoria but do not ignore the positive arguments of the optimists. Integrate both perspectives into your investment strategy and make balanced reasoned judgments as you invest your portfolio.

In my view, that's what's required in the world as uncertain as we face today.


Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.