There is no shortage of issues to worry about in our troubled global neighborhood, but then again, anybody older than 25 years old knows the world is always an uncertain place. Whether we are talking about wars (Vietnam, Cold War, Iraq), presidential calamities (Kennedy assassination, Nixon resignation/impeachment proceedings), international turmoil (dissolution of Soviet Union, 9/11 attacks, Arab Spring), investment bubbles (technology, real estate), or financial crises (S&L crisis, Long Term Capital, Lehman Brothers bankruptcy), investors always have a large menu of concerns from which they can order.
Despite the doom and gloom dominating the media airwaves, and the lackluster performance of equities experienced over the last decade, the Dow Jones Industrial Average and the S&P 500 index are both up more than 20-fold since the 1970s (those gains also exclude the positive impact of dividends).
Times Have Changed
Just a few decades ago, nobody would have talked or cared about small economies like Iceland, Dubai, and Greece. Today, technology has accelerated the forces of globalization, resulting in information traveling thousands of miles at the click of a mouse, often creating scary financial mountains out of meaningless molehills. As a result of these trends, news of Italian bond auctions, which normally would be glossed over on the evening news, instantaneously clogs our smart phones, computers, radios, and televisions. The implications of all these developments mean investing has become much more difficult, just as its importance has never been more crucial.
How has investing become more critical? For starters, interest rates are near 60-year lows and Treasury bond prices are at record highs, while inflation (food, energy, healthcare, leisure, etc.) is shrinking the value of people’s savings. Next, entitlement and pension reliability are decreasing by the minute – fiscal imbalances and unrealistic promises have contributed to a less certain retirement outlook. Layer on hyper-manic volatility of daily, multi-hundred point swings in the Dow Jones Industrial index and a less experienced investor quickly realizes investing can become an overwhelming game. Case in point is the VIX volatility index (a.k.a., the “Fear Gauge”), which has registered a whopping +57% increase in 2011.
December to Remember?
After an explosive +23% return in the S&P 500 index for 2009 (excluding dividends) and another +13% return in 2010, equity investors have taken a breather thus far in 2011 – the Dow Jones Industrial Average is up modestly (+4%) and the S&P 500 index is down fractionally (-1%). We still have the month of December to log, but in the short-run the European tail has definitely been wagging the rest of the global dog.
Although the United States knows a thing or two about lack of political leadership and coordination, herding the 17 eurozone countries to resolve the European debt financial crisis has proved even more challenging. As you can see below in the performance figures of the major global equity markets, the U.S. remains the best house in a bad neighborhood:
Our fiscal house undeniably needs some work (i.e., unsustainable deficits and bloated debt), but record corporate profits, record levels of cash, voracious consumer spending, improving employment data, and attractive valuations are all contributing to a domestic house that makes opportunities in our backyard look a lot more appealing to investors than prospects elsewhere in the global neighborhood.