10 Reasons Why You Should Stay the Course
There was certainly no dearth of bad news in the markets and around the world in May of this year which helped make this month one of the worst months in recent market history. The Greek debt crisis, demise of the euro, the BP oil spill and the Chinese government’s attempts at slowing down its economy all contributed to elevating investors’ level of anxiety and causing a substantial pull back in the markets. While some investors may be wondering if this is a sign of worse things to come, and there certainly is a possibility that the debt crisis in Europe could get worse before it gets better, we do not believe that the stock market is on the verge of another bear market.
In a piece written at the end of May 2010 entitled “10 reasons why disciplined investing continues to make sense”, Alfred Lam, Vice President of Investment Consulting and Portfolio Manager at United Financial, the wealth management arm of Assante Wealth Management, lists the following 10 reasons as to why investors should stay the course:
1. Corporate earnings are strong. Eighty-three per cent of U.S. companies beat analysts’ estimates in the previous quarter. Analysts’ expectations are still reasonable and achievable.
2. Profit margins have improved substantially as companies aggressively cut expenses in 2008. There is limited pressure for further cuts.
3. Inventories have been drawn down as economies recover, but production has not yet caught up with demand. Companies have to start hiring and that should boost consumer confidence.
4. Corporate CEOs have been extremely conservative with their spending. Corporate balance sheets are very strong, with unusually high cash levels.
5. Worries in Europe will likely slow the efforts of central banks in withdrawing economic stimulus. Interest rates will remain low for longer than previously expected.
6. The “flight to safety” has boosted demand for U.S. Treasuries. Mortgage rates are lower as a result, and that is a positive development for the U.S. residential real estate market.
7. Investors are overreacting to the negative news from Europe by painting all countries and stocks with the same brush. Fear has unduly punished good-quality companies and countries that enjoy strong fundamentals. Health care and information technology companies generally look very attractive. Emerging markets stocks are starting to look interesting again.
8. Oil prices have dropped 20% in a matter of weeks. While this is negative for oil companies, it is positive for households and most economies. We have underweight positions in oil companies relative to our benchmarks, but our portfolio managers have recently become opportunistic buyers of selected firms because they believe oil prices will be much higher over the longer term.
9. A weak euro will benefit exports of the fundamentally sound European countries like Germany and France.
10. Solid balance sheets and stable, growing earnings are the dominant themes in our portfolios. We expect these well-managed companies to return cash to shareholders through increases in dividends and by buying back their shares.
33 Comments | Posted in Financial Planning for Business Owners,Retirement Planning,Savings and Investments,Stocks
September 22, 2010
32 Comments for this entry
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