We have covered the reasons that bank lending has declined in previous Market Commentaries: 1) bank capital shortages due to the surge in credit losses; 2) uncertainty surrounding future regulatory guidelines, including capital requirements; 3) a sharp decline in the demand for credit as consumers pay down debt in response to massive wealth loss in the housing and stock markets; 4) the failure of banks to cleanse their balance sheets of bad loans and securities.
The basic problem in our economy right now is that everyone, including banks, consumers and businesses, is hoarding their money. Until this situation reverses, we are unlikely to have economic growth more typical of a recovery.
In summary, we remain cautious because we see systemic problems in the economy. However, we concede that the stock market could do very well if the Fed continues to pump massive amounts of money into the economy. Therefore, we think there is an element of downside protection in the near term which is providing investors with some comfort to get more aggressive with stocks. We will call it the "Bernanke put". As with the "Greenspan put", the Fed's actions could be supportive of stock prices for a period of time. Longer term, however, we doubt the Fed has the prescription for what ails this economy - too much debt.
Despite our economic concerns, many high-quality, blue chips stocks look attractive at today's valuations (especially when compared to bonds). Quality continues to lag in this market, and we see this reversing as investors begin to more fully appreciate the headwinds to the economy. And as always, we believe stocks will continue to be an important way for investors to achieve their long-term retirement, inheritance, and philanthropic goals
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.