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Portfolio strategy update Happy days are here again By David Gottstein
It is election time and things are looking pretty rosy.
The economy continues to move ahead at a healthy clip, but its pace is slowing to one that the Federal Reserve is more comfortable with. There is even talk of a rate easing next year as the Fed’s strict monetary policy continues to take hold, in part because money supply continues to be a drag on the economy.
Unemployment is still very low, with few signs of inflation other than in the petroleum sector.
In effect, high oil prices are helping Alan Greenspan maneuver to a soft landing.
Consumer confidence and income growth continue to be positive. Company earnings and stock prices continue to grow and recover.
The dollar remains healthy. The rest of the world, by and large, has been able to avoid a recession this year. Benefits of Governor Bush win On top of all this, a Gore win would presage a further reduction in the federal deficit and therefore would auger for lower rates, and a Bush win would likely generate big tax cuts. Both outcomes would be positive for the market in the short run.
The prognosis is that the economy, absent any adverse big surprise, is poised to continue to generate growth and wealth for the foreseeable future.
The factors that have generated the good times are structurally still in place. These include continued and dramatic productivity improvements spawned by the computer chip, along with other science and technology, expanding, market-oriented global trade, an ongoing and huge telecommunications infrastructure build-out on a worldwide basis and its associated efficiencies, and a high-growth, surplus-driven domestic economy.
With all this in place, it seems that happy days are here to stay. Invest at your own risk We must remind you that there is no free lunch when it comes to risk and return. There are still some pitfalls for the market to watch out for. The market is not cheap, even though it is not overly expensive.
Looking out four to five years, a 10 percent growth rate in S&P earnings, paying a twenty-four multiple, will only get you slightly more than a six percent total return, including dividends and before taxes, at these market levels.
The easy stock-picking days are over, even though we have a healthy environment for earnings growth.
Secondly, the Fed could overshoot the runway and cause a recession.
We are still reaping the benefit, or pain (however one wants to look at it) from a protracted period of monetary tightening in terms of interest rate rises and negative real monetary growth.
The market is not priced for any slow or non-growth surprises.
In addition, it is common for stock prices to rise in an election year, only to fall during the first year of a presidency.
This is not a prediction here, but fact.
China, China/Taiwan, the Middle East, wage pressures, oil spikes, or the Euro collapsing could all help spoil the party.
Enjoy the ride, but don’t get too relaxed.
Editor’s Note: This portfolio update is from David Gottstein’s monthly newsletter put out by Dynamic Research Group in Anchorage. It was compiled early in September.
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