February 13, 2012
The S&P 500 is near post-financial-crisis highs. The 10-year yield on U.S. Treasury's is near post-crisis lows. The former points to confidence and growth potential. The latter points to extreme risk aversion. The question is: who are you going to trust? The preponderance of the evidence, I believe, is currently in favor of the message that the Treasury yields are sending.
First, you have the rate of earnings growth at a low point during this "recovery". That suggests we are near peak earnings in this cycle. Without stronger global GDP growth earnings are unlikely to accelerate again. Global GDP growth is being hampered primarily by the perpetual European financial crisis, which has already tipped many of the EU member nations into a recession and has left several big ones on the brink (Germany, France, UK). Although we may not share their fate and tip into a recession as well, it's hard to see how we improve with one of our largest trading partners suffering so much. Additionally, we've used all of our ammo if another global shock hits; the Fed has already bottomed interest rates and our deficits are already north of $1 trillion annually. That leaves us vulnerable and it's not hard to imagine where a shock might come from. We have Europe, as mentioned above. But there is also the Middle East. And those are the risks we know about. The ones that usually hurt the worse are the surprises.
It's not all roses out there. So, what's a smart investor to do? It will always seem attractive to think the market has returned to growth like we saw in the late 1990's or again in the mid-aught's, but the need for a conservative outlook is strong for the reasons outlined above. My suggestion, in general, is to be very cautious. In this climate, this essentially equates to pulling in the reins on your growth assets to an underweight position relative to your long-term financial plan. If you don't have a financial plan that includes specific guidelines for investing, meet with an advisor as soon as possible to make one. Otherwise, it's hard to know the specific risks you and your family are facing.
Brennan R. Redmond, CFA
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).