Three Reasons Why We're Not Facing the End of the World

In August, the Federal Reserve came to the rescue by dramatically lowering interest rates. Lower interest rates typically encourage lenders to lend and consumers to spend.

Rate cuts encourage investors as well. In fact, the August/September/October cuts propelled stock assets to new highs in early October.

On October 31, however, the Fed hinted that it might not lower rates further. What’s more, economic data on lending and spending activity have been noticeably tame as banks/insurers/lenders report tremendous losses.

Ever since, stock assets have fallen dramatically. We’ve seen the Dow Industrials move from 14000 to 13000 in a matter of days. We’ve seen the largest corporations in the S&P 500 collectively fall about 6.5% from highs. We’ve seen the smaller companies in the Russell 2000 jointly record year-to-date losses for 2007. (Note: Data as of 10:15 PST, 11/9/07)

One might be inclined to say, "It’s pretty darn ugly out there." Or is it?

Here’s why we’re not facing the end of the world:

1. Interest Rates. Financial companies and housing/real estate is troublesome enough that the Fed will likely continue cutting rates. They may talk tough about standing pat. But eventually, they should bring rates down even further to help consumers and homeowners. Lower rates encourage economic growth across the board, helping stocks. Lower yields encourage investors to buy stocks.

2. The U.S. Dollar. It’s so inexpensive, and everyone is so "down on the buck," people will start snapping up the U.S. currency. As that begins to happen, foreign companies are going to want to invest in U.S. companies while U.S. companies are still trading at a phenomenal discount.

3. Employment and the Economy. Granted, U.S. consumers are no longer using the equity in their homes as ATMs. However, the country remains closer to full employment than at any time in the previous 3 decades (on average). Working people spend. Moreover, companies in industries outside of housing/finance are still thriving, particularly those businesses that operate abroad.

As I mentioned in yesterday's post, you may wish to purchase ETFs that work well in uptrends AND do not get hit as hard in sell-offs. The Market Vectors Global Agribusiness Fund (MOO) is capitalizing on the global growth of agriculture. The PowerShares Global Clean Energy Fund (PBD) is prospering in a world searching for ways to provide energy. And if you believe in the world's thirst for natural resources, Canada via the iShares Canada Fund (EWC) remains quite potent.

Granted, there is a U.S.-based housing slump. We can even call it a "housing recession." But the preoccupation in the media with the idea that the entire economy is heading into the toilet is... well... premature as well as immature.

In fact, the economy cannot overheat with housing in dire straits. If the economy can't overheat, and there's evidence of solid growth with limited inflation, the Fed is left with the ability to further cut interest rates when necessary. And that means, stick with what's been working, both in the U.S. and overseas.

Countries with increasing consumption needs require their alcohol, toothpaste, cigarettes and TP. That makes the iShares Global Consumer Staples (KXI) attractive. Moreover, they need the power turned on and their cell phones to communicate. Look for more good things from WisdomTree's International Utilities Fund (DBU) and WisdomTree's International Communications Fund (DGG).