It seems as though perception and reality are coming to a head across the world. For much of this year these views and the wide disparity between them have caused economies to stagnate, according to many respected experts.
Beginning with the “too big to fail” banks and corporations a few years ago, the bailouts are spreading to complete countries today. The common denominator between them appears to be the perception that irresponsibility in the governing and management of those entities does not result in repercussions that affect their futures. Should those that mismanage through lack of skill or criminal fraud be allowed to be bailed out and given a fresh slate?
More and more signs are appearing daily which show those that are doing the bailing out are coming to the reality that this cannot possibly continue indefinitely. One example is the problem Germany is having in its decision to bail out Greece and other struggling Eurozone countries. Germany’s people sued to try to stop the use of their tax dollars to bail out countries that have no desire to cut their spending and budget deficits.
In our opinion, we are beginning to see what can be termed a showdown between the perception of it being ok to live beyond your means, and the reality that someone will have to pay for the shortfall that ensues.
This showdown is what is keeping our investment markets trading violently between a range of approximately 1,100 and 1,250 as measured by the S&P 500 Index. Advances and declines over the past month or so have obliterated volume and percentage records since trading began. Three and four hundred point moves in a day in the Dow Jones Industrial Index is commonplace. Down days are supposedly caused by Eurozone debt problems and our stagnating economy while big up days are credited with strong U.S. Corporate earnings and balance sheets. Adding to this volatility is the fact that nearly 60% of the trading on these big days is done by automated computer programs which employ High Frequency Trading (HFT) strategies, holding massive positions for just few minutes at a time.
So the reality is that there are problems both home and abroad that require the leadership to come together and form effective plans. The media expounds on the problems daily so we all know what they are. The fact that 90.9% of people in this country are employed is also reality. Retail sales were higher than expected last month. The majority of corporate earnings have beaten their estimates this quarter. Railroad car volume is at all time highs. Insider buying of their own stock by corporate executives is spiking upward. Restaurant reservations have shown no weakness and one analyst points out that in his 25 years, no recession has ever begun without the restaurant business weakening first.
Until we see plans to begin to solve the world’s challenges, we believe that it is likely that the markets will stay in this range, and that interest rates on savings and bonds will remain low for the foreseeable future. The past decade has showed though that profits can be made in range-bound markets. Astute trading and finding value is mandatory though. We have complete confidence that the investment managers we select will continue to make these good decisions going forward. Having a diversified, balanced approach we believe will get us through these events again. We have all seen this movie before and the ending has always been the same.