At any given moment, investors are confronted with a vast array of economic and political issues that affect the global investment landscape. These often dire events create market uncertainty—which, in turn, leads directly to investor apprehension.
Based on our conversations with clients and our own observations, the professionals at BWFA have identified four areas that are at the top of investors’ concerns right now.
Will there be a stock market correction?
A market correction takes place when major market indices like the S&P 500 decline by 10%-20% from their top. Since 1926, there have been 20 stock market corrections during bull markets. Will another correction occur? Inevitably, yes. It might even come in the not-so-distant future. But discerning investors—those who are willing to look beyond short-term market obfuscation—will undoubtedly prevail as the market races on to future peaks. Stock prices are mostly based on expectations of corporate earnings, and expectations are for significantly higher earnings.
Will inflation emerge in the U.S.?
In an unremitting attempt to bolster the U.S. economy, the Federal Reserve has implemented QE2 (Quantitative Easing, 2nd attempt), a multi-billion dollar bond-purchase program. Effectively, the Fed is pumping money into the economy via the purchase of long-term bonds, with the expectation of reducing long-term interest rates, and thereby stimulating growth.
The question on the minds of BWFA clients is, “Will this monumental stimulus package ultimately lead to inflation?” The answer: yes, eventually.
But take note, the influx of dollars being injected into the economic system by the Fed purchasing bonds will serve as a catalyst for expansion. In time, inflation will materialize primarily as a result of economic growth stemming from favorable interest rates that encourage capital spending (thank you, Fed), cash being re-channeled from a savings mode to a consumption mode, and renewed confidence in the American economy.
The bigger question is what policymakers will do when signs of inflation emerge. Obviously, they will need to act delicately to ensure that inflation (not to mention deflation and stagflation) is kept at bay. But I think we all would agree that the prospect of higher corporate profits, lower unemployment, and the continued advancement of the U.S. stock market would vastly outweigh any endurable level of progressively controlled inflation that we may be exposed to in the coming years.
What is the economic impact of the political crises in the Middle East?
The protests throughout the Middle East and North Africa are based on the simple, yet vital, premise of individual rights and freedom. The broad impacts are too numerous to discuss in this article. But one possible impact is a prolonged rise in the price of oil, which has the potential to impede or at least stall our current progress toward economic recovery. Higher oil prices would not only be seen at the pump, but also would raise costs throughout the supply chain. However, eventually, Americans will adjust and prosper by improving energy efficiency and developing alternative energy sources. High oil prices create investment opportunities in alternative energy.
Will Japan’s disaster affect economic growth?
We offer our prayers and very best wishes to all the people of Japan, their families, and their friends. Our opinion is that this disaster, while devastating for those affected, will have long-term beneficial economic effects worldwide.
Conclusion
The world will continue to change, and we will continue to adjust our strategy in light of these changes. We note that the S&P 500 index (including dividends) is still off its October 2007 high by -7.6%, while BWFA’s average client is only off by -0.6%. It is important to remember in these times—as always—to remain steadfast to the merits of diversification, because the pace of progress will vary by company, industry, and—not least of all—global markets.
Feel free to contact a BWFA professional or stop by our offices if you’d like to discuss your specific investment strategy and objectives.