Remember, we can’t rally for real until we bottom for real.
Likewise, stocks are making progress towards forming their bottom levels. With the European debt crisis, monetary tightening in China, and fiscal and monetary tightening in the US; investors have mind-boggling data to consider when trying to determine future economic growth and a reasonable value for shares. The healthy tug-of-war between bulls and bears will take some time.
We expect continued volatility. Government funds in various forms have been responsible for most of the sustenance of the domestic economy for the past few years. Whether the bipartisan team of deficit cutters finds consensus or whether mandatory cuts are triggered; there is no question that the government will spend less in years to come. With high unemployment and an already large amount of debt, consumers are ill-positioned to drive expansion. For a GDP that relies more than two-thirds on consumer spending, it is difficult to imagine any sort of immediate snap-back.
It is important to try to understand how we came to be in this condition. While economists and strategists study data, it is vital not to ignore the behavioral and psychological factors that brought us here as well. My new book, The Arrogance Cycle, which will be released in September, offers important insight for not only the role of our societal psyche but for our individual mindsets as well. In a world of economic struggles and modest expansion, we remain defensive but not desolate.
America will get through this period and flourish again as she always has.
We favor large, multi-national companies with strong balance sheets, attractive share prices and good dividends. Stocks, in general, appear attractive relative to bonds. There is news this week that Warren Buffet has been buying. He says he likes stocks when they’re on sale. Mr. Buffet’s timing isn’t always perfect, but he’s done reasonably well getting the big picture right.
Hang in there.
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.