Economic gloom and doom seems to dominate the news lately. And yet, the recent performance of stocks and commodities appears to be telling us a decidedly different, even sunny story. What gives?
Let's fill in the blanks. First, the gloom: The World Bank just lowered its 2012 growth forecast for Asia, so it is now projecting even slower growth than we witnessed at the very depths of the 2008-09 financial crisis. As expected, the IMF followed suit a day later.
Meanwhile, much of whatever growth can be expected hinges on the 900-pound gorilla of the emerging economies, China-which, according to practically every economic expert, commentator, blogging pundit and his brother, is surely headed for dire straits and a pronounced slump.
Then there are the anxiety-filled headlines surrounding Europe which persist, day after day, week after week. Even the strongest economies, such as Germany, have turned down in recent months. And calls for more austerity for the likes of Greece, and Spain (which is expected to ask for a bailout any day now) will make getting out of their funk all the more difficult, as well as raise the specter of serious social and political ferment.
Here at home, the US economy is expanding at just a 1.3 percent rate by the latest estimate, and notwithstanding the recent unemployment report indicating some progress in that area, the pace of job creation remains so weak that the economy is having a difficult time absorbing new entrants to the labor market.
Moreover, earnings season is set to kick off this week with Alcoa (AA) first out of the gate. Corporate profits in the third quarter are expected to decline slightly, for the first time in 11 quarters. And with companies reluctant to increase their capital spending, the weakness could persist.
But… when we turn to stocks and commodities the markets are singing quite a different tune.
US equities touched a nearly five-year high the other day. Certainly the Federal Reserve's zero interest rates and quantitative easing are pushing investors into riskier assets. And the rally has not been confined to just a select group of blue chips: The unweighted average of all stocks traded on the New York Stock Exchange hit a record high last week. The broad-based nature of the rally suggests that there's more at work here.
Remember that stocks are a discounting mechanism. Their gains this year in the face of a less-than-stellar economic backdrop suggest that the money printing taking place around the globe will at some point have the desired effect of fostering at least a modest amount of growth.
Commodities have admittedly softened a bit in the past few weeks, but they are still quite high in light of such dismal current growth expectations. If the world truly were in trouble, wouldn't Brent crude be trading closer to $75 a barrel rather than the $112 it's selling for today? Likewise, why is copper selling for around $3.70 a pound, instead of something closer to $2.50?
Factoring all this disparate information into our outlook, our view is that …
The markets may not be expecting a strong recovery, but they are likely signaling that we'll avoid a double-dip recession
China will perk up as it heads into its once-a-decade political power transition and the new leaders take their places, and…
Europe will at least muddle along
That's not to say we simply dismiss the risks that do exist today. The dangers are all too real when it comes to the looming fiscal cliff, the chances of European austerity going too far, and the possibility of serious disruption to the global oil trade in the event that the situation with Iran blows up in any one of a number of conceivable scenarios.
In the final analysis, the essential question remains: "How does one invest in this uncertain and precarious climate?"
Our answer: With a well-diversified portfolio of high-quality equities.
Solid companies that will make money in any environment, such as pharmaceuticals and health care
Retailers catering to the cost-conscious consumer in this economic environment
Defense sector stalwarts, share prices of which have been more than discounted for possible spending cuts
Hedges to protect against both inflation and deflation, with the top candidates being physical gold and those ETFs that track the price of physical gold
You'll find the names of a number of outstanding picks in each of these categories in our flagship newsletter, The Complete Investor.
To highlight one of them now, we'll recommend Chesapeake, Virginia-based Dollar Tree (DLTR), an excellent example of a retailer benefitting from cash-strapped consumers' current need to focus on necessities.
The company has been growing by leaps and bounds, aggressively opening new stores, which now number more than 4,300 throughout the U.S., while efficiently acting to close down less profitable locations.
Dollar Tree shares have been on a dazzling run over the last four years, rising more than fourfold - and they still remain attractive. Trading at 21 times current earnings, they have the same multiple they had in mid-2007, when the market was flying high. But with the economy today in a very different place and consumers far more price-conscious, this low-end retailer's prospects appear far brighter.