| 08 November 2005
I don’t like to provide frequent or detailed commentary on the financial markets. There is far too much emphasis placed on the daily gyrations of the stock market and the impact of world events. If there was a great deal of volatility, or the outlook was bleak, I would try to alert my clients and let them know my thoughts via this web site or by email or newsletter. This has not been the case for the last three years. The stock market has been fairly calm in recent years. Although the stock market has been nearly flat this year, 2003 and 2004 were very good years. In fact, this month the S&P 500 index hit a four and one half year high.
Nevertheless, many people in Michigan are concerned about the economy. I think this is largely because we see the Michigan economy up close and personal. We know companies like Delphi, GM and Ford are struggling and this has an impact on all of us. The local housing market has cooled considerably as houses are staying on the market much longer these days, and this is undoubtedly related to the employment climate. And higher gas prices have take money out of our pockets. There is a tendency to let these local happenings color our view. It doesn’t help that the national news is also depressing - with the devastation of the Gulf coast hurricanes and the lingering war in Iraq.
It is important to keep in mind that the portfolios I recommend for clients are more closely aligned with the U.S. and global economies – which are in pretty good shape. U.S. GDP and corporate earnings have been strong since the economy bottomed in 2002 following the events of 9/11. Companies have reduced debt and improved their financial balance sheets since then. Interest rates and inflation remain very low by historical standards – and employment has been improving steadily nationwide. Tax rates are also relatively attractive, especially for investors. These are very positive underpinnings for the financial markets. While everything is not rosy and there is some evidence that economic growth is slowing in the U.S., most experts are predicting a fairly strong 2006.
Over the long run the global economy determines portfolio values. In the short and intermediate term, though, the stock market can move independently from the economy. This is because security prices are based on valuation measures not just fundamental economic factors. And the manner in which stocks are priced is based not just on quantitative tools but also subjective factors. Since investors are human, emotions enter into the valuation process.
Pundits argue whether or not the stock market is currently over-valued or under-valued. I don’t know the answer, but I know that most of us need to be in the market - and to stay in the market – in order to achieve our long-term goals. Still, I like to hedge my bets – and be prepared for different types of markets. The best way to do that is to diversify into many different areas including foreign stocks, foreign bonds, real estate and good old fashioned high quality U.S. bonds.
In short, I can’t tell you how your accounts will do next year (or any year for that matter) but I don’t see anything on the horizon that would precipitate a change in strategy. A good mix of investments - coupled with regular rebalancing - is still the best method I know to grow a portfolio for the long-run while managing risk at the same time.
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