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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


Island Investing: Market Direction

Q. Which way is the market headed?

A. My answer to this question is going to look similar to the answer I gave a few weeks ago regarding whether or not the recession is over. More specifically – in the short-term, I have no idea. That said, neither do the “experts” you see on television or read online. The common wisdom on Wall Street is often just plain wrong.

Former mutual fund manager Peter Lynch used to say, “If you spend thirteen minutes a year trying to predict the economy, you’ve wasted ten minutes.” For what it’s worth, here are three minutes of my thoughts.

I do not believe the stock market is set for an imminent collapse. In the short-term, there are still several positives that appear to be favorable, including lowered earnings expectations that should be easy for companies to exceed, a continuation of the government’s massive federal stimulus program, and the need for many investors to find higher-yielding investments due to extremely low rates available on cash.

That said, talk of another long-term bull market like the one we saw from 1982 to 1999 is premature. In contrast to economic conditions then, and as discussed in an earlier column, both inflation and interest rates are bound to increase eventually, though that could still be some months away. Anyone looking at the projected federal deficit over the next ten years would justifiably think a tax hike is inevitable at some point – whether as a value added tax or an increase in federal tax rates. Increased regulation of the markets and the aging of the baby boomers are other factors that would seem to differentiate the stock market today from history’s most recent bull market.

So what’s all that mean for investors? For value investors, it doesn’t mean much. The process for selecting stocks should be consistent, regardless of economic and market predictions. As Warren Buffett once said, “Short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”