At the end of August, the DJI closed near the 10,000 mark ending a pretty dismal month in which the DOW gave up all of the years gains and then some. The U.S. economy continues sputter along with little significant job growth and an unemployment rate near 10%. With underemployment nearer to 20%, economic growth will continue to plod along until enough people get hired to get the underemployed back into the job market which will eventually wind down the unemployment numbers and bolster consumer confidence and their willingness to spend.
Many companies need to realize that they are not doing themselves, their investors, or the country and favors by sitting on a pile of cash. Expect to see greater capital spending 4Q10 and hiring pick up 3Q11. Prediction: DJI 10,900 at year’s end.
A Tactical Plan for Today’s Global Equity Markets
As I mentioned briefly in my financial blog, The Financial Planning Corner, the global stock market, with the possible exception of emerging markets, is now driven more by human behavior than economic fundamentals which is exacerbated by the media who overly dramatize financial and economic news and are not beneath doing a little fear mongering to sell newspapers and ratchet up viewer ratings.
In its present weakened state, the global economy is no match for a capitalized news media! So how do we deal with a stock market that often reacts more strongly to infotainment in the guise of news reports and ignores positive corporate earnings and economic reports?
The answer is to build a long term portfolio strategy of diversified stocks, bonds, and cash based on your life goals and your investment horizon with a tactical plan to exploit the emotional gyrations of the market. Notably, the global stock market’s current volatile reaction to widely divergent economic “news” will present numerous opportunities to leverage your tactical investment plan and accelerate the recovery of your portfolio.
I am not proposing that you use your tactical plan to time the market—far from it, what I am proposing is that you seek opportunities to buy and sell equities that are oversold in response to hyper-inflated news reports or investor hysteria. The key is to recognize when a company or a sector has been outrageously maligned despite solid fundamentals or because they have earned it.
To effectively deploy your tactical plan, which should represent only a small portion of your overall portfolio, you must determine if the price declines represent an investment opportunity or a fundamental shift in a company or sector’s business prospects. Of course the reverse is true when a company is overhyped as we have seen numerous times with some biotech companies with drugs in failed clinical trials. Shorting those stocks can also be profitable but a much riskier bet as it is more difficult to predict the outcome of a phase 1 or 2 clinical trial of a drug manufactured by a company that has never made a cent for its investors.
Your tactical plan should consider companies or sectors that you understand with an established track record and business metrics. A reasonable sector example would be SPDR S&P China ETF (GXC). This China large cap growth ETF has ranged from a low of $62 to a high of $76 over the last year. Within that time frame, the price has oscillated $5 or more, at least 8 times, with the greatest fluctuations occurring with news of a pending real estate bubble, an overheated growth rate, rampant inflation, and a flexible Renminbi (yuan) no longer pegged to the dollar to name a few.
Since this ETF is relatively concentrated, it rapidly responds to divergent news, but its strong fundamentals with holdings in finance, telecommunications, and energy allow a quick recovery and a minimum $5 per share target spread is a reasonable objective for a tactical investment plan.
With an economy that is now the second largest in the world, a debt to GDP of only 17%, and a government that can respond more quickly to economic issues than the Western world, this ETF should appreciate over time but will continue to fluctuate until global economic conditions improve.