The murky outlook for stocks?
U.S. equities today are generally viewed as close to a safe haven as anything one can invest in. The alternatives at the moment: bonds, risk reward is terrible, no; emerging markets, political turmoil widespread and China slowing, no; precious metals, gold plummets and China commodity demand in check, no; CD's, bank deposits and money market funds, no return, extremely negative real return, no; private equity, out of reach for those who are not already really really wealthy, no; the dollar/yen trade, who can choose to live with the volatility of currency investing, not many, no; and on and on we go.
Equities as a safe haven. Is that a viable concept? Not for the long term perhaps, but for the short term maybe it's true. For the longer term, or medium term, there is a problem to consider. Bonds at current levels do not play their old role as a balancing act to moderate portfolio risk. The Fed can control short term rates and continue to support the stock market by almost forcing money in to seek some return, but the Fed does not control medium term or longer term bond rates and prices. Anyone who thinks they do believes in Oz. The market will make its own decisions and the Fed will only be able to watch.
When these rates go up as odds might suggest they will, they raise the cost of capital for equities. The hurdle rate for shareholder value accretion rises. The discount rate for determining the value of future cash flows rises. In general that will put pressure on the equity market, and make stock picking crucial.
In the near term with conditions in Europe, Latin America, China, and most other investable markets under some pressure, the U.S. equity market should hold up well. By historical measures and by earnings capacity it is not in the aggregate overpriced, and some would suggest it is a bargain. The ongoing strength of economic growth is uncertain, however, and that fact reverberates through the equity market.
Now it is still be best place for most investors to have a healthy allocation. Ultimately though, equity market values are not determined by supply and demand or by alternative choices. They are determined by valuation. Diversification is necessary and a cushion for downturns is essential. Darn it, WHERE?
Equities as a safe haven!? --- we have come a long way from the technology stock crash of 2000 and the multi-faceted market crash of late 2008. The unexpected is becoming more common in markets just as it is in weather it seems. We live with uncertainty, maybe more today but uncertainty has always been a constant.
At this point, I guess I'm more or less as conditioned to it as one can be, or certainly more so than in earlier years when there was no capacity here to hold my ground.
Equities as a safe haven. Is that a viable concept? Not for the long term perhaps, but for the short term maybe it's true. For the longer term, or medium term, there is a problem to consider. Bonds at current levels do not play their old role as a balancing act to moderate portfolio risk. The Fed can control short term rates and continue to support the stock market by almost forcing money in to seek some return, but the Fed does not control medium term or longer term bond rates and prices. Anyone who thinks they do believes in Oz. The market will make its own decisions and the Fed will only be able to watch.
When these rates go up as odds might suggest they will, they raise the cost of capital for equities. The hurdle rate for shareholder value accretion rises. The discount rate for determining the value of future cash flows rises. In general that will put pressure on the equity market, and make stock picking crucial.
In the near term with conditions in Europe, Latin America, China, and most other investable markets under some pressure, the U.S. equity market should hold up well. By historical measures and by earnings capacity it is not in the aggregate overpriced, and some would suggest it is a bargain. The ongoing strength of economic growth is uncertain, however, and that fact reverberates through the equity market.
Now it is still be best place for most investors to have a healthy allocation. Ultimately though, equity market values are not determined by supply and demand or by alternative choices. They are determined by valuation. Diversification is necessary and a cushion for downturns is essential. Darn it, WHERE?
Equities as a safe haven!? --- we have come a long way from the technology stock crash of 2000 and the multi-faceted market crash of late 2008. The unexpected is becoming more common in markets just as it is in weather it seems. We live with uncertainty, maybe more today but uncertainty has always been a constant.
At this point, I guess I'm more or less as conditioned to it as one can be, or certainly more so than in earlier years when there was no capacity here to hold my ground.
posted by John Borden at 5:28 PM
1 Comments:
Be careful my friends. Having money that earns little or no interest is better than having money in investments that can decline by 40% in just a few months if an inuexpected financial crisis shows up again. I keep a large cushion, a fat mattress.
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