The market has been largely news-driven of late, fluctuating to the tune of the latest headline. Stocks have been taking it on the chin, but the news is not all that bad. In fact, the news remains pretty good:
1. low rates
3. good earnings
4. negative investor sentiment
The problem is that all of this good news is old news.
In the big picture, Greece, Spain and the rest of the EU will not bring down the world. The steps the EU, IMF and individual nations have taken recently are appropriate and should help resolve the crisis. Just this week, both the Germans and British announced additional austerity measures with large cuts in government spending. Yes, it will dampen the strength of the economic recovery – not only for Europe but also Asia and North America – but we already know the world is in a slow growth environment.
Stocks appear oversold right now, and should not “let go” quite yet. The big question will be consumer spending. The last few reports have shown moderate increases, and if that trend continues we’ve got a new bull market on our hands….but that’s not what I am expecting. My crystal ball shows a severe slowdown in spending, continued high unemployment and lower-than-expected GDP. That will lead to the dreaded deflation, which will be horrific for stocks. Regardless of the outcome, we remain alert and on the ready.
Different economic cycles require different investment strategies. Stocks do well during inflation periods but get hammered by deflation. Bonds do well with deflation but get crushed by inflation. And of course, during a crisis of confidence everything gets killed.
This is a very dangerous environment and investors must be prepared with a “tactical” investment approach. In addition and most importantly, there will be a time in the near future when you will need to be in cash, so you must have an exit strategy.