What I know about the market’s action at present is that its general trend is down and that volatility is intense. I know that trends last longer than people expect.
This current trend, in my opinion, is a continuation of the 2008 downturn.
World economies and markets are continuing to respond and react to years of profligate spending and profound over-dependence on credit. These excesses, no matter how one would like to criticize how ill-considered they were, were huge, and they will take a lot of time and pain to repair.
The good news is that reconstruction is underway. Economies cannot begin the process of expansion (no matter how desperately desired) until they have completed the process of contraction. While I’m encouraged by the drop in oil prices, very low interest rates, strong earnings reports and strong corporate balance sheets; no fundamental turn is possible until fundamental demand returns. Fundamental demand means that people have both the means and desire to purchase goods and services. The US consumer has accumulated double the amount of debt he had in 1980 (relative to income), has a bad job market to contend with, and is seeing the prices of things increase. While the American desire to spend seems to beat like life-force in American chests, the means are simply not there and will take time to return.
Passenger vessel captains know that storms are part of their jobs. Investment managers know the same thing. Our choice has always been for the more stable, defensive vessel and the calmer course. We’d rather take a day or two longer to reach our destination than put our vessel or passengers in jeopardy.
Ignore the noise. In deference to my wonderful friends at CNBC, I won’t tell you to turn off your televisions, but please hit the mute buttons. The current hysteria WILL NOT help your investment returns. Part of being a long-term investor is going through horrible periods like this one. Warren Buffet has come through countless horrible periods. These are the trials by which successful investors earn their stripes. Unless this really proves to be the end of the world, it will pass.
I believe that America continues to be the best environment in the world to reward and protect innovation and growth. As America navigates her way through yet another crisis, she will emerge stronger, and her people and corporations will be renewed and flourish. Corporate America will expand. Investors with the stomach and tenacity to endure the volatility will enjoy the fruits of their long-term investments.
Hang in there. We will reach our destination together. Don’t hesitate to call us for a little hand holding and stock-talk if we can help.
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.