Since Ben Bernanke released his latest bond-buying program, also known as QE3, U.S. and European stock markets have tacked additional gains on to a summer rally built on anticipation of such a program. They weren't let down. Not yet, anyway.
As was the outcome of both prior rounds of easing, the overall market indices continued their ascent although each successive program has predictably shown a decreased positive impact on equity prices. With aggregate corporate earnings growth stemming primarily from cost-cutting, i.e. smaller workforces and declining spending, the effects of quantitative easing have primarily served to artificially inflate asset prices. Underlying demand for stocks, as demonstrated by market volume, has continued to decline.
Earnings growth, employment, and thus overall economic growth has been flat even amidst the purposeful devaluing of U.S. and Euro currencies. Now, proponents of Federal Reserve and European Central Bank stimulus programs will point to measured inflation (when food and gasoline are extracted from the rate) as justification a government can continually devalue its currency until economic growth returns. However, these proponents still can't point to any proven, concrete benefit that the first two rounds of programs have delivered. The only argument is "Imagine what it would be like if we hadn't done it."
Well, that's up for debate. And so far, aside from undue increases in gasoline and food prices (amidst declining world demand) the long-term effects are not yet known. However, we can deduce that easing programs have done nothing to spur organic economic growth; the kind of growth so important to an investor when making forward-thinking decisions.
So, as an investor in an environment where market prices are not primarily derived from supply and demand conditions, but from artificial demand provided by government bond purchases and thus a systematic debasing of the world's reserve currencies, how should my investment strategy encompass this new reality?
First, one must keep in mind that with each new round of quantitative easing, associated marginal returns have declined. So, simply buying an asset, whether a stock or commodity, and expecting a subsequent rise in price may have worked under the first program but is unlikely to continue to work as well. With this thought in mind, traditional asset pricing models, i.e. earnings growth rates, will continually become more relevant. As world economic growth rates slow, a prudent investor will only seek out undervalued assets; those with low P/E ratios relative to their peer groups and/or those with high yields. Many times, emerging markets can provide both growth and yield while remaining somewhat buffered from the volatility of the world's reserve economies.
Second, implement this value strategy with a long-term horizon, but reevaluate every six months. New opportunities, and risks, seem to arise much quicker in a volatile world economy than in traditional one. It is safe to say that as long as central banks continue to intervene in asset markets, the likelihood of a random precipitous decline or advance remains high. As a value investor, these events present valuable opportunities, and not being aware of one's positioning can quickly equate to missed opportunities or unnecessary losses.
Finally, put excess reserves and savings to work in a municipal bond fund to avoid taxes and grow your savings. It is more important than ever to have money on the sidelines, but as world currencies are debased, keeping up with inflation becomes more difficult, and thus parking reserves in U.S. dollars or Euros is eroding your returns. Savings accounts at local U.S. banks are yielding approximately 1/10th to 1/5th of one percent. This is costing you money, not just in missed returns, but in decreased spending power. There are many states if in which you reside and purchase your state's local and/or state bonds, returns are exempt from local, state, and federal taxes. Take advantage of it.
I base my time horizons on six month periods, and continually reevaluate my holdings while planning for the next six months. Many times, I hold my investments for much longer than six months, and many times for a shorter period. In this economic climate, blindly buying and holding leads to "the lost decade" or what many have dubbed the first decade of the 21st century. Returns on investment only become lost when we don't adapt to continually changing economic realities. Everyone who is still sitting back on their heels waiting for "a return to normal" will still be waiting in another ten years. This is the new normal.
Article Source: http://EzineArticles.com/expert/Michael_Lasko/1253046
No comments:
Post a Comment