August 2012 Monthly Outlook – Paradox

“Here’s the paradox: the odds are overwhelming I will end up richer by aiming for a good return rather than a brilliant return – and sleep better en route. Folks who seek a killing usually get killed. Gunslingers get shot, and often in the foot, with their own guns.  While there is always some guy around on a red-hot streak, his main function is to tempt the rest of us into becoming fools and paupers”.   Ken Fisher, Forbes, 1989

I open this month’s Outlook with this quote because it seems appropriate in this volatile time for investing. Depending on which news channel you watch or which website or blog you read, either everything is ok and the markets are going higher or everything is terrible and we are headed for another recession and market debacle.  I believe the truth (and reality) lies somewhere in between.

Right now there are some troubling signs of a slowdown both in the US and global economy.  A preliminary report of Gross Domestic Product (GDP) for the 2nd quarter was released last week showing the US economy grew at only 1.5%, well below historical levels of 2+%.  However, this figure is comprised of private sector – which grew at 3.4% – and government – which shrank by 2.4%.  It is encouraging to see the private sector resume its leading role in economic growth.  From 2009 through 2011 a large portion of our economic growth was fueled by government spending.

On the global front, the ongoing debt crisis in Europe is putting a significant drag on growth.  Many of the peripheral European countries (Greece, Portugal, Spain) are already in recession.  Even stronger countries like Germany, France and even China are starting to see slowdowns. However, political leaders and central bankers both seem to have woken up to the fact that increasing taxes & cutting spending to reduce deficits in the midst of a recession is not a formula for success.  The political landscape is shifting from fiscal tightening to stimulating growth. Since the beginning of July, the European Central Bank, and the central banks of China, Brazil, Australia, South Korea and South Africa have cut interest rates.

Right now I see the glass as half-full.  Interest rates are at historic lows, allowing many families and corporations to refinance and reduce debt.  Job growth, albeit slower than needed, is occurring.  Housing is finally showing real signs of stabilizing.  Investable liquid assets (money markets + small CDs + savings accounts) are at all-time highs.  There are 3 things that concern me and would force a change in my outlook: (1) US politicians don’t come up with a plan to deal with the “Fiscal Cliff” (expiring tax cuts and required spending cuts); (2) Iran and its potential impact on oil/gas prices; and (3) a significant unexpected event like last year’s earthquake/tsunami in Japan. {While the current drought in the mid-west is terrible I do not expect it to have significant broad-based economic impact}

From an investing point of view I continue to aim for a “good return rather than a brilliant return”.  This is best achieved by staying diversified, owning both stocks and bonds while keeping some cash available to deploy as opportunities arise.  I believe we have been reasonably successful in meeting this standard over the last 2+ years.

Although the information included in this report has been obtained from sources we believe to be reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

 

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.