Some Words of Wisdom to Investors

Dear Fellow Investor, the events of the last couple of weeks gave me the idea of providing a counterpoint to all the Chicken Little comments being made on investment news channels of late.  I think it is appropriate to send a few paragraphs during these difficult days and hope they will help my fellow investors stay on course.

The IMF chief says the global economy needs to tame hot money to help developing economies achieve stable growth. That statement was not made in a vacuum. A plethora of bad news is plaguing the world markets.

Stock markets are under severe pressure so far in 2016, with the FTSE 100 having the worst start since 2000. In the US, the Dow Jones industrial average has made its poorest ever start to a year.

Oil prices have also fallen sharply due to a supply glut and fears of lower demand, this is exacerbated by the impending exports from Iran once the sanctions are lifted. Tensions between Iran and Saudi Arabia make it less likely that OPEC can agree to cut production to halt the slide in prices. Brent crude is down another 30 dollars to its lowest level since April 2004.

The Fed finally embarked on a rising rate policy.

Investors have been spooked by fears of a severe slowdown in the Chinese economy and a fall in the value of the yuan, not helped by a crash in the country’s stock market despite attempts to curtail selling by the Chinese government.

It seems that there is no end to the negative news worldwide and that there is no safe haven. That is what it seems like. Let us look a little deeper and see if the rest of the year is going to be totally negative. When the world turns dark all at once Investors lose sight of all the positives:

1)      For the first time Europe seems under control and the spiral of deflation and defaults is manageable. In fact, the continent is finally out of the recessionary negatives and into positive GDP growth albeit at a meager rate.

2)      The current correction is orderly; unlike that of last August it did not come out of the blue. All the reasons for the correction have been in the news for some time, but the reaction to them was delayed.

3)      Interest rates, at least officially, started to increase on December 16 of last year but all indications are that the rates will not be increased precipitously. It will be a carefully measured and date based interest rate policy, which means they will not continue rising if it is found that the increased rates are causing the economy to suffer. The current environment may adjourn the next increase to the end of 2016.

4)      China’s economic slowdown is more due to the conversion from industrial export to a service and domestic consumption economy. The adjustment will take some time but will not bring the economy to a sudden halt. There are indications that policy makers have a better grasp of the situation than most people think. Once the conversion is half way completed, the Chinese economy will most likely resume a mid to high single digit growth rate.

5)      Our economy is still growing at the rate of 2 to 2.5% which is low by historic standards but it is still acceptable.

6)      Oil prices will start to increase due to many small to mid-size companies ceasing production. Their exit will result in the rebound of prices by next year and in some estimates (Goldman Sachs) before the end of this year. The rate of mergers among these companies will continue to mount for at least the next year, resulting in the natural process of “survival of the fittest”.

7)      Corporate profits, while declining a bit due to the strength of the dollar, are still healthy.

8)      Do not under estimate the resiliency of the US economy.

9)      A lot of exciting stuff is happening in technology that will filter its way into profitability and economic growth.

10)    Liquidity is abundant and a lot of cash is available both at the corporate as well as the central bank level. Sooner or later, this liquidity will help turn the markets around.

I recommend that you stay calm and level headed as long as you made the right choices in the last few months. If you have the desire to make some changes to your portfolio, I suggest that you add some selections from the banking and technology sectors. Avoid high yield and long-term fixed income (over 5 years) and accept the fact that we are in an atmosphere of volatility that may last longer than usual.

To learn more about Guy Conger, view his Paladin Registry profile.

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