This is what a market turning point looks and feels like.
We won’t know for sure whether it is a significant turning point until it unfolds. This is another way of suggesting that a storm is upon us and we can’t assess damages until it has passed.
What we know is that we have enjoyed an unprecedented number of calm, clear days. At a current reading of 16.4, the CBOE SPX Volatility Index, a measure of expected volatility in stocks better known as the VIX , is hovering close to multi-year lows. Since bottoming in March 2009, share prices have doubled. We recall that as share prices were making their lows in 2009, voices of the herd were assuring all available ears that they were absolutely going lower. They didn’t. Nowadays, it is hard to find someone who thinks stocks can go significantly lower.
Voices of the herd have greeted good news and bad news with optimism. In the first four months of 2011, markets have embraced economic crises among several European economies, regime changes and huge instability among oil producing countries, not to mention a massive earthquake, tsunamis, and a nuclear meltdown. We say embraced because all of this news led to markets gains of more than 5%.
John Maynard Keynes said that markets can remain irrational longer than you can remain liquid. With that in mind, we do not believe in market timing, but we recognize the extreme importance of adhering to one’s investment discipline more tightly as the winds howl and boughs break. Winds are picking up.
Finally, we have observed what appears to be the genesis of a rotation into just the sorts of companies we have been advocating for some time. Shares of large multi-national companies with strong balance sheets, ample cash flow, modest debt, and earnings growth are finding buyers. A steady, experienced hand on the tiller is crucial as weather approaches. Our hand is steady, and we advise passengers to breathe deeply and hang on.
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.