I am not good at small talk.
In social gatherings I find that I compensate for this shortcoming by either talking a lot about things I like (can you spot the boor in the room?) or by wandering around the room trying to avoid eye contact. In those rare times when I am able to have a more normal conversation with someone, the talk inevitably turns to the economy and/or the stock market. When someone finds out what I do for a living, they feel compelled to offer me their take on the world. For the last year or so, the conversation has gone something like this:
Random Person: “Financial advisor, huh? How about that stock market? I hear things are really dicey now in the market.” [By the way, this has been the opening line from almost any random person I’ve spoken with over the last 2 years or so]
Me: “Actually, the S&P 500 was up nearly 25% last year and so far in 2010 is up around 6%. Valuations seem reasonable, corporate earnings are steadily growing, balance sheets are flush with cash and sentiment, which as you know is a contra-indicator, is still quite bearish.”
Random Person: “Oh, really? But what about the economy? I hear that it’s really weak. Stocks can‘t do well when the economy is weak, right?”
Me: “Consensus estimates for GDP growth for 2010 are around +2.6% and for next year the IMF is estimating growth at around 2.3%. Not too long ago, U.S. GDP growth around 2.5% was a very good thing. That’s the economy’s non-inflationary growth average over the long run. The global economy is growing at around 4.8% this year and is predicted to grow 4.2% next year. Given that about 50% of U.S. corporate earnings come from outside the country, I suspect that U.S. corporate earnings will continue to grow under the current GDP estimates.”
Random Person: “But what about _________ ? (This is a fill-in-the-blank statement reflecting the latest “crisis” in the news – today it could be Ireland or China. In the past, it could have been Greece, the Gulf of Mexico oil spill, etc.) I hear that ______ could lead to another major global crisis.”
Me: “Possibly. But consider that the global economy has just been through the worst crisis since the great depression and has recovered. I suspect that at this point the policy makers have learned a great deal from the events of the last three years and are better prepared to handle any little crisis thrown at them.”
Random Person: “But what about the housing situation and unemployment? How can the stock market go any higher with these two huge problems left still unresolved? The consumer is totally stressed. No jobs. Banks are going to take their homes. Given that the consumer represents 70% of the economy, how can stocks do well with the consumer in such dire straits?”
Me: “Ninety percent of people who want jobs have jobs. Most analysts are now calling for holiday spending to be higher this year than last. People may be saving a bit more, but consumer spending looks reasonably robust. Housing was a major growth factor in the middle of last decade and now it has become a drag. Yet, the economy is still growing despite this drag. At some point, house prices will bottom and may again have a positive impact on the economy. I don’t think a housing recovery is critical to the success of the stock market. That was so 2006. Anyway, about 35% of the foreclosures so far in 2010 were properties owned by investors and not the primary residences of homeowners. Although things are not rosy yet in the housing industry, the raw numbers reported may overestimate the magnitude of the problem.”
Random Person: “Well, yeah. But, I’m still going to wait for more certainty before investing in the stock market.”
Me: “Please pass the chips…”
Only once in my career has this mythical sense of certainty emerged – in the late 1990s. At that time, EVERYONE KNEW stocks were going to go up. I remember new associates at my firm, fresh out of college, using cash advances from their credit cards to day trade stocks. Everyone was a “genius” back then. We all know how that period of certainty ended.
The old masters of investing always tell us that the best time to invest in the stock market is when uncertainty is high. Think back to March 2009, the time when the market bottomed. How was certainty then? In the final analysis, this is why investing is not easy. To be really successful at it one must continually overcome both the “fight or flight” instinct buried deep inside us and the highly reasonable consensus opinion presented daily in the media.