Most economic analysis hasn’t been accurate over the last several years, and it’s partially due to the severity of the financial crisis, which almost brought about the complete collapse of the stock market. While history is replete with all kinds of recessions (some more severe than others), memories are short on Wall Street, because that’s what most people are doing there—working for short-term gains.
Imagine if you were a Warren Buffett type of investor; you’ve already made enough money to live comfortably and you’re running a large investment portfolio, the purpose of which is to invest in businesses at good prices for the long term. Your holdings would reflect the general state of the economy, but you would relish the opportunity to buy more companies when prices retreat. That’s your business—to invest in good businesses and good managers. The returns are the returns. They can’t be predicted and that’s why the entry price is so important.
Big investors like Buffett and hedge-fund managers like George Soros invest a lot of money in a lot of different types of securities. They also trade around their positions as market conditions warrant. Soros has been selling gold recently, but still has a very large net long position. My favorite investment analyst, Jim Rogers, makes big, calculated investments based on a theme or trend, and then trades around the position as market valuations change. Before Rogers makes a big investment, however, he waits for the marketplace to achieve extremes in prices. In the absence of market extremes, he just waits. That’s how you have to be as an investor—patient and flexible.
We know we’re in a period of slow economic growth. We know the economy is sputtering, as are employment and the housing market. These are all structural issues that take a good deal of time to correct in the business cycle. So, from my perspective, it’s a hurry-up-and-wait kind of market.
Predicting the stock market is an irrelevant endeavor. Predicting earnings and cash flow from a business—now that’s a different story. I think we’re likely to see share prices continue to drift until second-quarter earnings season begins. Once again, the market will expect its numbers to be met and, more importantly, it will want to see improved corporate visibility for a stock to go up in price.
Predictions are just guesswork, but expectations for returns from stocks are currently being driven down. This makes the near-term outlook weak. But, it also makes outperformance later that much easier. Barring any major new shocks to the system, the market is setting itself up for an earnings rally at some point within the next nine months. That, by the way, is just a guess.