Be Happy. Don't Be Afraid To Own Stocks
A few days ago, Colin Lokey published "Why You Shouldn't Be Buying Stocks". See it here. It was much commented upon. Mr. Lokey appeared to be addressing a hypothetical investor who had stayed out of stocks for a long time and was considering getting back in. I do feel sorry for that hypothetical investor unless she was in gold the whole time. But most of us who read SA - and probably most of us who write for SA as well - are pretty much always invested in stocks to some material extent. The question for us is, after doing pretty well since February 2009 and quite well for the last few months, is this a time to cut back, a time to reduce our current level of commitment to stocks, whatever that level is?
I do not purport to know what the markets will do tomorrow or the next day. But I believe that the time to pare back the stock portfolio is when the potential downsides of major events appear to be greater than the potential upsides over the medium term. I believe that the upsides today over the medium term are greater than the downsides. I am not all in, but I am continuing to hold primarily equities.
What are the things that we are worrying about? Iran, Europe, oil prices, Chinese housing, U.S. Government debt, state and local pension fund debt, unemployment, a sluggish housing recovery. Probably I have missed a few things that are high on your dear reader's agenda. But let us deal with my list. We can deal with your list in the comments.
No question: Iran is a problem. But I think the U.S. is not stupid enough to try to punish Iran militarily and Iran is not stupid enough to invite the U.S. bombers and drones in by attacking Israel. The Imams may be crazy, but not that crazy. And Israel will not do anything that it does not believe can succeed. Israel probably does not have the power to succeed with a targeted attack, and the U.S. at this time is not likely to authorize such an attack.
Continuing boycotts and sanctions against Iran likely will continue to roil the oil markets, keeping prices higher than they would be otherwise. But a blowup is unlikely.
Europe is not out of the woods and will not be for a long time. But no big problems are likely to come along in the next six months. Greece may or may not do whatever. That may have a short-term impact on stock markets. But Greece is a pipsqueak economically, and the impact will be limited. Yes, there is the possibility of contagion. But I believe the Europeans are prepared to deal with the contagion issue.
Mario Draghi has a long-term plan that has a good chance of working. See my article explaining the plan here. The major issue is what happens in the French election. My personal prediction is that if Sarkozy loses, M. Hollande will have a hard time delivering on his anti-European campaign rhetoric. A Hollande victory likely would cause stock markets to go down, but only briefly.
The tension between oil prices and economic activity may well be in play if oil prices remain high due to the Iranian situation. But the markets actually deal pretty well with this kind of problem. The market reacts to high prices by using less oil, then oil prices moderate. Again, some likely short-term issues but not the kind that move markets for months at a time. No WIN buttons needed.
If you are worried about high oil prices, buy more oil stocks as a hedge.
If the Chinese housing market crashes, will that cause havoc in global stock markets? I do not see why. The U.S. housing markets caused havoc because the whole world was holding U.S. mortgage paper. Nobody outside China holds much Chinese housing paper. The Chinese banks that hold it are too government-owned to fail.
U.S. Government Debt
Congress kicked the can down the road to 2013. The can will stay there until it is kicked further down the road.
State and Local Pension Fund Debt
This is a really serious problem, make no mistake. It is and will be a drag on the U.S. economy for a long time. But neither the depth of the problem nor any proposed steps to ameliorate it are likely to play a material role for the rest of 2012.
Unemployment will continue to be a problem. It will hold back consumer spending as it should do. But employment appears to be gradually increasing, and increasing employment gradually leads to healthy consumer spending that is funded by earnings, not additional debt or robbing the social security system.
Sluggish Housing Recovery
The sluggish housing recovery is very important in holding back economic growth. I discussed the medium-term prospects for housing a week or so ago here. My take is that a recovery is beginning but that housing is not ready to take off. Calculated Risk (see here) has had some pretty optimistic charts the last couple of weeks. I would look for housing as a potential upside for 2012 rather than a downside.
Some Potential Upsides
· Housing could well begin to recover more rapidly. The potential for all the kinds of stocks that benefit from Americans investing in their homes is significant. Home Depot (HD), Lowe's (LOW) and Whirlpool (WHR), among others, already are up significantly but may have further to go. If you own a lot of any of them at a low price, you may want to take some profits and rebalance. But I do not see them as a sell at this point.
· If housing begins to recover, a virtuous cycle is likely to begin. As unemployment declines, consumer spending therefore increases, business investment therefore increases to meet the new demand, etc. That is the way recoveries are supposed to work. And this one should work that way some day. The key is for some of the semi-skilled to become hirable again. It looks like only construction can do that.
So as my title says: Be Happy. Don't be afraid to own stocks - unless, of course, you will need the money tomorrow. A time will come to sell. It always does come. But in my opinion, we are not there yet.
My general take on investing is available here.