Riots in Greece, the Euro falling off a cliff, Oil trading below $70 and Gold on a tear. The headlines are ugly. It is all bad, or so we are led to believe. If only the media were able to predict the last bear market!
That bear market only ended 14 months ago. As tends to happen, current predictions are based on the most recent past. We tend to use the events of the last few years as a playbook for how the current news will impact financial markets. While few people were able to predict the severity of the bear market just 3 years ago, it seems as if everyone and their cousin can predict the next bear market, which is just around the corner. Financial markets do have a tendency of repeating history, but not with such a short lag between events. Very few people are willing to go out on a limb and say what is happening in the context of the current environment. It is easier to frame events from today in what happened over the immediate past.
So, should our economic and market assumptions be any different from our assumptions a month ago? Nope. Huh, did I just say no? Yup. What about all the bad stuff that I mentioned in the first paragraph? Greek riots are bad for Greeks, not sure it will have that big of an impact on North American consumer. The Euro is bad for European consumers and North American exporters ( but good for European exporters). Oil prices declining is a negative precursor to economic growth, but effectively puts more money in the pockets of consumers.
Do not get me wrong, things are not great. The US consumer is in trouble, but we know that. US real estate recovery has stalled, but it is not getting any worse. The US recovery is still in place and the problems on the periphery of the Euro zone are unlike to change that.
We continue to believe that the recovery will continue, but maybe at a slower rate than we thought a month ago. North American companies sell very little to the Southern European economies. Most US-European trade occurs with the Northern European countries, which remain in better shape than their southern brethren. The reality of what is going on with Greece, is that global growth will be a little less than originally thought, but growth will still be solidly positive.
Can you guess what the S&P 500 has done since it reached its peak in late April? It is down around 8%. That is solidly in the range of a typical 5 - 10% correction. After the run-up from the March 2009 lows it is not surprising that we were due for a correction. We believe that this is nothing more than a cyclical correction in a bull market.
Stocks (and the market) are not expensive based on historical standards. Earnings will continue to grow and we will wake up at some point and find out that Europe is not that big a deal (from a global growth perspective).
Our investment strategy remains unchanged, which is to buy large cap stocks with growing earnings that have attractive valuations. At the current time, we are finding lots of stocks that meet this criteria.
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