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Portfolio strategy update:
Still a time to be cautious
David Gottstein
Editor’s note: David Gottstein is with Dynamic Research Group in Anchorage. Being an optimist by nature, I don’t like thinking negative thoughts. And I would really like to have this very challenging phase in the economy and the stock market pass sooner than later. There has already been a tremendous amount of pain suffered by investors.
The stock market has rebounded nicely from its October lows, and has put in a record performance in October.
Is it a presage of things to come, or what should be viewed as a rally to sell in to?
Productivity continues to rise, but…. The good news is that productivity continues to rise, inflation is still at bay, and that a below average 7-8 percent growth rate in corporate earnings going out a few years, against a market price earnings ratio of 17-18 down the road, will achieve for investors low single digit returns once again.
The bad news is that we won’t likely get there in a straight line.
It is true that we will come out of this on the other side in much better shape than we are today, but in the short run, things are not looking so rosy.
The question is whether we are slowly growing our economy back onto an even keel, or are we heading for a rougher landing than has been anticipated.
A bit rougher than expected We are cautioning that it is likely to be a bit rougher than otherwise previously thought. Unemployment ticked up again, auto sales are down, even in an environment of easy financing, and consumer confidence, has taken a tumble.
It doesn’t sound like we are going to have a very merry Christmas shopping season this year. In addition, we haven’t felt the full effects of what will likely be a series of state government budget cutbacks as a result of significant decreases in tax collections.
This, on top of the potential costs of the pending war with Iraq, and the unknown fallout, has yet to be felt.
The China factor The other factor is one we have been alluding to for many months. And that is the China factor. We think the Chinese have outsmarted us.
They are playing a game, and winning. If we give them lots of money and capital, they will let us give them our best technology, our jobs and big ownership positions in the manufacturing companies we bring to them.
This means, in addition to some long-term structural problems growing, that much of any increase in demand domestically will most likely this next time be supplied by factories in China, instead of America. So we won’t get the full benefit of what is often referred to in economics as the multiplier affect; where purchasing creates jobs which generates incomes and more purchasing.
A weak domestic economy, weak economies overseas except where they are kicking our butts, and the huge challenge of fighting terrorism on a global basis, are all factors leading to what at best is going to be a prolonged weak recovery.
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