2010Jan22 Market Optimism: A Mixed Bag

2010Jan22 Market Optimism: A Mixed Bag

This week’s poll asked how people where they think the market is headed for the new year. The poll was not scientific and was driven by radio listeners of the syndicated Don Creech Radio Show (www.DonCreech.com) and subscribers to Investor Resources Week In Review email update.

 

If you had a thousand dollars to spend, do you think investing it in the stock market would be a good or bad idea?
 
Slightly more than three quarters of respondents have a positive view of investing in the market. This is an interesting anomaly since most investors have been shifting money from stock mutual funds to bond funds. The recent decline in the DJIA has been modest but resulted in more demand for bonds. Is that the next financial bubble? It certainly seems likely.
The final quarter of 2009 was a period of consolidation in the markets and the number of stocks in bullish trends had been weakening. As we started January, the NYSE moved back to a positive trend and was joined this week by the OTC. Short term news has tweaked negative emotions again moving bond prices up and yields lower.
 
Thinking ahead to a year from now, do you think the stock market will be higher, about the same, lower?
 
This seems to be inconsistent with the first question. Slightly less than 30% think the market will be higher at year end. That is a roughly a third of the respondents who think investing in the market is a good idea. About half expect no change by year end with the remaining respondents still carrying bearish concerns.
 
Do you or someone in your family have any money invested in the stock market right now?
 
Almost 90% of the respondents indicated that someone in their family is currently invested in the market. If you are neutral to negative about the year’s prospects, why would you stay exposed to the risk? Then, it raises the question of what is the alternative for your money?
 
Thinking ahead to a year from now, will the U.S. stock markets or the international markets have better returns?
 
There is a very strong agreement that international markets will provide better returns by a 3 to 1 margin. Internationals have been providing better returns than most domestic holdings. Presumably, the US financial woes and consumer spending declines will have less impact on foreign investments. It has certainly been true since the last quarter of 2008.
 
 
Modern Portfolio Theory maintains the trend cannot be sustained. Everything reverts to the mean. Trends, however, can last longer than many expect for reasons not predicted or understood until after it’s over.
 
 
Modern Portfolio Theory, as commonly explained, asserts that risk is managable through diversification and rebalancing to target allocations. Market risk, however, IS NOT an objective of MPT as reported in a recent interview with the president of Ibbotson Associates, Peng Chen.
 
   "If you look at modern portfolio theory, one of the key things modern portfolio theory tries to do is really try to mitigate risk. The risk that it mitigates through diversification is the undiversifiable risk part, and the part of risk that it cannot mitigate is the systematic risk part.
 
So what happened in 2008, of course, the market came down quite a bit, and a lot of the portfolios following modern portfolio theory also suffered. If you look at it, a lot of people automatically draw the conclusion that modern portfolio theory didn't work, because the risk is still there.
 
But if you look at it, the risk really came in, in 2008, as a systematic risk part, which is the risk that modern portfolio theory did not claim or did not attempt to try to address.
 
So from that regard, actually, yes there was a lot of risk in 2008, but we believe modern portfolio theory actually continued to work. It's just that the risk happened to be the systematic risk part, and that is not what modern portfolio theory addresses."
 
 
Now the academics tell us that the broader market risks that we worry about are not addressed in the MPT models! Great! That leaves us returning to management processes in place prior to the late 80's when software made MPT models readily available. We must follow trends, prices and the flow of money in and out of the market and portfolio holdings.
 
Has your overall confidence in the U.S. economy been increasing or decreasing?
 
The same percentage of respondents who expect foreign markets to be a better place for portfolios indicated decreasing confidence in the US economy. Our population is spending less money and trying to get out of debt. We believe those economic changes at the household level will continue to accelerate and amplify budget problems at all levels of government.
 
When, not if, government entities start staff reductions, consumer confidence will decline even further as unemployment extends its upward trend. In spite of staff reductions, the largest government expenditure, the push for higher taxes will not abate discouraging consumers, employment and business expansion.

These negatives could reverse if Congress abandons its current plans to increase taxes on estates, income, health coverage and the global warming economic assault - Cap & Trade (i.e. Tax).