After going through multiple investment bubbles, a severe credit crisis, and two painful recessions, the “Lost Decade” for stock investments has come to an end.
In fact, the latter half of 2009 left us with a rather robust recovery and the idea that we may be participating in a sustainable economic recovery.
At the beginning of every month, during what we’ve coined our long-term investment “Outlook” meeting, our investment team gets together to debate different investment ideas of where we each see opportunity in the marketplace, while also trying to identify potential risks that could trip us up.
This process involves detailed discussions in which we compile a healthy collection of economic data and opinions to determine where the financial markets may be headed.
A central theme we discuss around being a successful investor is understanding where and how you have a competitive advantage over another investor. A key to identifying these opportunities is knowing which sources are worth listening to vs. ones using biased assumptions to create support for their opinions.
After formalizing how these scenarios may or may not develop, we investigate specific ways that we can position our clients’ assets with the expectation that their portfolios will most advantageously benefit.
Observations after the Lost Decade
Here is a summary of a few of the issues we discussed in our January “Outlook” meeting:
- Even though the unemployment percentage still hovers around 10%, this could be yet another positive for future stock market growth. Typically, high unemployment coincides with the start of an economic expansion which is good for the stock market.
- Consumers and US corporations continue to improve their balance sheets. Both groups have built up a healthy amount of pent-up demand which should continue to fuel the recovery.
- The average age of a car on the road is now 9.5 years old (which is the oldest average ever). 2009 saw new car sales reach their lowest unit level since 1982, even with the added cash for clunkers steroid shot.
- China is now the largest consumer of cars in the world. Which naturally increases global demand for oil. But at some point other energy sources will become viable which will reverse this trend. As oil prices rise, pressure for alternatives will continue but in the short-term we are not decreasing our energy holdings.
- One of the pressing primary risks is how smoothly the hand-off will be from government stimulus to private sector growth. It’s important to remember that discussions about the removal of stimulus funds, interest rate increases, the speed of recovery and inflationary threats are a part of all economic recoveries and are typical for a bull market as it climbs its wall of worry.
- On average the market experiences a 10% drop at some point every year. So it’s not out of the realm of possibility that these lingering fears could cause some short-term market fluctuations.
- We feel that US high quality dividend focused companies’ likely hold the most opportunity for 2010. However, we’re still allocating a significant portion to foreign stocks as a way to add diversity to client portfolios as well as provide a hedge against the US dollar.
- We still see little threat of inflation in the short term as the world has substantial under utilized resources. It will likely take years to re-employ those resources, though we may still get an up tick in inflation in the medium term.
How did your investments fare during the Lost Decade?
Photo Credit: Hartwig HKD