Sense & Nonsense
While we expected considerable market volatility, the markets are being spooked by a variety of uncertainties. What investors are seeing and hearing in the headlines about the “nightmarish” S&P downgrade of US Treasuries is one thing, but deeper uncertainties exist and are playing out. However, as we often see, despite some truly legitimate issues at play – namely Europe’s debt issues and the continuing slow growth in the US – the reactions are being strongly amplified by emotion – and the downgrade only stirs up the fever pitch.
There are several ironies here, not the least of which is that even as the headlines scream that S&P (Standard & Poors) has for the first time in history downgraded US Treasuries (until now always rated “AAA”), investors have fled to… US Treasuries. With all the market uncertainty, investors have run to what remains the sanctuary of the good faith and credit of the US. As an additional irony, of course, the rating downgrade is by the same entity that promoted high ratings to subpar securities that helped spur the financial collapse we’re still reeling from.
So why, then, should we care about an opinion from a single rating agency with questionable credibility? In a healthier environment we, and the investing public, wouldn’t. But the pot that already holds an economy in a fragile state with the uncertainties of Europe and geopolitical issues in the Mideast, fears of further job loss, an hysterical and dysfunctional Congress and electorate, and an investing public still in trauma from the Financial Crisis, needs little more to create a toxic stew.
Maybe now, however, we can get down to the real business at hand. While the nation has been consumed by debt-crisis conversations, dysfunction, and obfuscation, the most central issue – domestic economic growth -- was getting short shrift. Perhaps now that the Congressional fanatics’ hostage-taking political adventure is, for the moment over, awareness will continue to grow that the focus has been on the wrong illness, and that is what’s been taking its toll in the markets as well.
Indeed, logic suggests that starving the sick is not the way to health, and the same is true of the economy. The political obsession with deficit reduction is only adding insult to the infirm. The upshot: a large part of what the markets are responding to has little to do with the downgrade, but rather the perception that the government is clueless as to how to focus on growing the economy, which, frankly, it has been. Hopefully enough investors and appropriately frustrated citizens can drive the most insane and self-serving of the lot back into the dark forest, or at least open their eyes to reality. While this doesn’t make the volatility and pain any less significant – indeed, we are bit surprised with the intensity of the current fear -- a few steps back reveals a picture that while not quite rosy, is far from the doom and gloom the markets are currently reacting to. In fact, we continue to anticipate a slow growth environment, and expect to see some Federal Reserve activity should this market negativism continue.
A year from now there is a very good chance that this moment will have been, like mid-March 2009, a terrific buying opportunity for equities. For investors with extreme risk tolerance (or nothing to lose), this might be a viable strategy. For most investors, however, this remains a time to be cautious, despite high levels of corporate cash and profitability, low interest rates and inflation, high levels of growth in the emerging markets, and Europe slowly working through its debt issues. The greatest threat to an emotionally-driven market is the potential for self-fulfilling prophecy. Should sufficient fear paralyze the markets and cause enormous equity losses, it could further damage growth and turn the economy downward. The old FDR adage is, once again, in play, and we must take note. Indeed, if growth stalls entirely, fear will be a large precipitating cause. Accordingly, we expect volatility to remain with us and continue to monitor market conditions very closely. While most of our allocations having been conservatively focused for some time with some of our fixed income clients enjoying portfolio growth in these trying times, for equity investors, we’re taking a thoughtful and pragmatic approach to any buying opportunities, and are prepared to reduce equity exposure should we see stronger negative economic trends. For most investors who are properly positioned, this is a place to hold tight but remain vigilant. In the meantime, let’s all hope for sanity.
Good Harvest Financial Group