Great Expectations and the Equity Market

equity market“It was the best of times; it was the worst of times.” This famous line by Charles Dickens aptly describes the current state of the equity market. There are great expectations, but little conviction to make them happen.

The bulls and the bears are making perfectly good arguments at present. That’s why there’s consolidation in equities right now. Equally a toss-up is the state of investor sentiment, which doesn’t have earnings, but rather sovereign debt and other conflicts to worry about. It’s no wonder individual investor participation is low.

Nobody likes thinking about risk, but there remains some fragility in global markets that should not be ignored. With no defined trend in most financial markets (other than some commodities), it is difficult to make any well-reasoned new bets. As I wrote before, in general, now isn’t the time to be considering new positions. It’s a time to watch and research attractive opportunities in anticipation of a decent new entry point. There’s no rush to do anything in this market as far as I’m concerned.

Stock prices moved significantly higher since the end of August due to a sharp change in investor sentiment. The fundamentals and the economic data, however, didn’t change. Now we’re experiencing a pullback, which I think is healthy. But, stock prices have been sustained in large part because of the unattractiveness of other assets, like bonds and cash. If this were to change, then the equity market would be in real trouble.

I want to come back to investment risk and reiterate my view that it is very high at present. Accordingly, an investment portfolio in this environment needs to have some strong defensive positions. I’m not saying that one shouldn’t own stocks, but only the right ones that have solid track records of increased dividend payments to shareholders. The speculative end of the stock market is as it always is—a crapshoot.

The most attractive investment assets going forward are those that are “real.” Precious metals, agricultural commodities, oil and gas. Gold deserves special attention in my view, and not just because it’s a hedge against inflation. Gold will be the only asset left if the sovereign debt issue cascades into a global crisis. Don’t ignore gold and other real assets in your investment portfolio. The age of austerity continues to make owning these resources more and more attractive.