Streetwise

Lauren Rudd

Sunday, January 2, 2011

The Markets Are Full Of Possibilities 

“...The world looks brand-new,” said Hobbes. “A New Year...a fresh clean start,” said Calvin. “It's like having a big white sheet of paper to draw on," said Hobbes. “A day full of possibilities,” said Calvin. “It's a magical world, Hobbes old buddy...let's go exploring.”

Bill Watterson wrote those words in December of 1995 as he concluded the last of his Calvin and Hobbes comic strips. Every year since then I open my first column of the New Year by quoting that phrase because the message is so abundantly clear. The financial markets are analogous to Calvin's magical world...full of possibilities. All that remains is for you to go exploring.

Looking back on 2010, Wall Street astonished virtually everyone. The Dow Jones industrial average has chalked up a gain of about 14 percent, the NASDAQ nearly 17.54 percent, while the S&P 500 index is up approximately 14.98 percent. However, history is not the issue here. Rather it is what you are going to do going forward that counts. And despite what you may have been told, investing in stocks has been and still is still the greatest wealth builder of all time.

If you are apprehensive as to your ability to adroitly invest going forward, take heart. Successful investing is not difficult. Common sense, combined with a modicum of patience, will often produce annual gains of between 11 and 15 percent. Nonetheless, there will be times when stochastic events of an exogenous nature will take their toll, even if it is only temporary. That is the nature of the beast.

Now wait a minute you say. Can a mere mortal really be successful in today’s investment environment? Absolutely, the only real damage comes from panic induced selling. Instead, devote your attention to an asset allocation program that incorporates economic factors, both nationally and globally. With stock prices still relatively low, your investment risk remains manageable with an ongoing opportunity to achieve substantial gains going forward.

No, I am not going to be so rash as to try and predict short-term market trends at this point in time. Without the late Madam Marie of Asbury Park and her crystal ball that would be futile, especially when you consider the upcoming political shift in Washington and its economic consequences. Nonetheless, here are some tidbits to consider.

The Fed has made it abundantly clear that interest rates are likely to remain at their current low levels, probably through all of 2011. The Fed is also continuing with its ongoing quantitative easing (QE2) program. Inflation is benign and the financial markets are forward looking, meaning that Wall Street tries to anticipate future economic conditions four to six months out. To that end, I would agree that the economy will likely continue to gain ground, at least through the first half of  2011, thereby putting a dent, albeit a small one, in the level of unemployment.

The difficulty is that for the last several years the consumer has been carrying the economic load, despite virtually stagnant income growth. This was made possible by a continual increase in the amount of debt incurred. Recent holiday retail shopping aside, the average consumer is now reducing debt. Therefore, corporate investment must take up the slack and become the driving force behind economic growth going forward.

Meanwhile, over the next few weeks you are going to be inundated with market forecasts of every description. Many will try to conjure up a primordial fear of Wall Street, but offer salvation if you immediately subscribe to this or purchase that. Do not to fall sway to the passions of the market, the tenets of its prognosticators or those selling new improved versions of snake oil. Instead, consider the words of Wall Street legend Lucien Hooper.

"What always impresses me," he once wrote, "is how much better the relaxed, long-term owners of stock do. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional."