Covestor model: Trend Spotting
The stock market has been falling recently, and is now down significantly from its 52 week highs.
Investors continue to back away from the market as economic indicators show a weakening economy and a spreading global credit crisis. I have been an optimist, believing we are in for a slowly improving economy due to the Federal Reserve’s proven actions and stated commitment. I continue to believe this scenario is well within reason, and that the Fed is doing its job in keeping rates low and liquidity high.
What I have not appreciated, and my portfolio has suffered recently because of it, is the fiscal policy side of the equation (I think it’s because I try hard not to involve politics in my investment decisions). Monetary and fiscal policy are required components to a rational and orderly market. This statement has nothing to do with politics, and everything to do with our capitalist system. Our country has become very politically charged, and the market is giving us a reminder that that good politics isn’t the same thing as good fiscal policy.
This country faces many difficult challenges today, and the blame goes out to almost every one of us for our current economic situation. Our system is one where we work hard, do some good and some bad, and quickly address the bad with fixes that are openly challenged and perfected. We are going through this process now with the economy, addressing the “bad”; unchecked excesses from various forms of poor governance. Like so many great things about a free market system, the stock market is a consensus machine based on all inputs and opinions. This gauge is currently saying that we have yet to get the formula right. With the right formula, the gauge goes up and the process is confirmed with prosperity.
This economy will continue to wallow until our policy makers reduce the debt, fix the housing market and create jobs. The policies to date have not solved the issues, and in some cases have actually made matters worse. We need real solutions that will enable growth and allow the economy to get out from under these problems.
If you are to assume that fiscal policy was on track like monetary policy is (I had not separated the two), the stock market is attractive as corporate American is in the best shape in history. Companies are lean, well managed, filled with efficient technology, educated and motivated people, and hoards of cash. Its like a stable of thoroughbred horses at the starting gate that won’t open to let them run. Eventually, voters and Corporate America won’t stand for more lost opportunity and unrealized value, and will take matters into their own hands.
When fear prevails in markets as it has recently, fundamentals are often discarded and investors’ actions become emotional. This is what is happening today, primarily because of a lack of leadership and good fiscal policy. The market has voted, and is on the verge of another scary leg down unless they find solutions.
The market is now trying to discount a recession. Let’s hope that we are turning the corner of this fiscal situation; that the credit downgrade is the wakeup call that gets our leaders to get serious and take action on a long-term solutions.
I am a buyer of quality assets with some of my portfolio cash at this level, with the knowledge that I am buying great companies at discounted prices, and that further weakness from poor policy will not be tolerated much longer.