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MAKING CENTS OUT OF THE NEWS
Blog #06
(February 11th, 2010)
IS THIS THE NEW NORMAL?
By Tom McAllister, CFP®
I am no longer in daily touch with the institutional investor market to the extent I was in the 1970s as Robert W. Baird’s Indiana manager. But I still follow closely the opinions of professional money managers. In fact, particularly at market bottoms, the actions taken by professional investment managers play a key role in starting a stock market recovery. An old stockbrokers' saying to the effect that “the cure to lower prices is lower prices" is very true. Whenever selling pressures in the stock, bond, or real estate, markets increase, prices are eventually driven to such low levels that more emotionally stable investors begin to snap up the bargains, thus initiating an upward price trend.
One remark I'm hearing and reading these days is that the economy and the stock market have entered a period of a “new normal,” meaning that the coming decade will be lackluster at best. I must tell you, I've heard similar phraseology following stock market bottoms throughout my nearly 48 years in the investment business, and I'm not buying into that idea for a moment.
As a rule, the more severe and scary the recession, the more negative sentiments turn, and the more prevalent the view that the "new" problems of the time are too big and too bad to overcome. When I hear this negativity from the present investment community, I am inclined to strongly disagree, and I look back to history as my guide. Following the market's "bottom" in 1962, stocks proceeded to double over the next four years. The fifty percent drop in stocks during the mid 1970's produced more talk of gloom and doom, yet for the rest of the 1970s the markets went sideways, returning about six percent a year in dividends amid runaway inflation. After the steep economic recession of 1980-81, stock prices went up 400% over the next twenty years. The fundamentals of investing do not change!
Timid investors need to ask themselves several questions. “Do I believe the U.S. and world economies will be stronger and greater five years from today? How about in ten years? If the answer is yes, do I believe corporate profits of publicly owned companies will share in this growth?"
Capitalism is dynamic, of course, and so not all corporations or even industries will participate in even the broadest of growth markets. We have seen giant corporations go bankrupt in the current severe recession, and truth be told, there will always be corporate failures, just as there will always be companies such as IBM, Microsoft, and Google rising to take their place..
When times are hard, the natural tendency among people is to lay blame, losing all faith in industry leaders. I remember that shortly after I entered the investment field in the summer of 1982, during a major market pullback and economic recession, President Kennedy, in the course of a heated exchange with U.S. Steel president Roger Blough, said his own father Joe Kennedy had been correct in saying "All businessmen are SOB's". My own experience suggests otherwise; most of the businessmen and women I have met in the course of my career, and, in fact, most business leaders during those years were decent, honorable people.
With so much volatility in the market, it's more important than ever that investors maintain a long-range perspective, accepting and even embracing short term market fluctuations with an eye towards opportunity. Fact is, measured historically rather than hysterically, common stocks are very reasonably priced, and I'm therefore convinced that the reasonable buying of quality shares during the current pullback will prove very propitious indeed.
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