Last year the investment markets turned in a very subpar performance.
Now the markets have started off 2016 with a sharp drop in stock prices, a continuation of the disappointment established last year.
The effectiveness of relying on just monetary policy is now coming into question by investors and economists alike. Since the last recession, the world’s governments have pushed their central banks to flood their economies with cheap money, hoping to stimulate their markets and their economies.
These same governments have been reluctant to employ any fiscal stimulus policies such as tax cuts (both corporate and individual) and some reduction of the complicated rules and regulations that inhibit production. It would seem that the goodies given away by politicians in exchange for votes are now suppressing the growth of the private sector and are continuing to shrink middle class incomes. Wouldn’t it be refreshing for the presidential candidates to tell their voters that there are no favors they can offer supporters that will not reduce their standard of living?
The current market decline is not like the 2007-2009 decline in stock prices. In that bear market, the financial sector of the economy collapsed into free fall as excess leverage in the sector wiped out many firms’ capital as home prices plummeted. The financial sector is again under pressure as the energy sector prices have collapsed, driving a number of marginal oil and natural gas producers into bankruptcy.
The difference is that even though some banks are on the hook for these extended energy producers, their entanglement is not nearly as severe or as widespread as it was during the housing collapse in 2008. Low prices in the energy sector will eventually correct themselves.
In the meantime we will have to live through low commodity prices damaging production companies while (as consumers) we enjoy low prices for gasoline and fuel oils. The airlines and truckers are certainly enjoying low fuel prices although freight tonnage is declining, portending a slower economic growth in the immediate future.
I am reminded of the transition from President Carter to President Reagan in the early 1980s. Following a decade of failed government economic policies, after a year or two the Reagan revolution created the longest period of economic growth since the 1960s. We have the potential to change policies at the federal and state levels and create another economic boom, which could increase employment and labor participation in the economy, reduce welfare payments, and balance the federal budget even as we expand our military preparedness and put an end to terrorism around the world.
The elements to our recovery and expansion are already available. I suspect that parts of the recovery are already in place with Paul Ryan as the Speaker of the House. A solid growth president would move us further in the correct direction to our recovery as would a pro-economic growth leader in the Senate.
When the investment community gets a whiff of economic change at the federal level, the stock markets will likely, as least in my humble opinion, surge to new highs as the old ways are displaced with the new and innovative companies. Meanwhile, we have to live through this volatile, directionless period, just as we did under President Carter.
The name of the game for your investment advisor is to keep your capital intact so you can benefit from the next surge in share prices. Investment advisors cannot provide you with gains in a directionless market, but you can expect them to keep you in the game so that when the turn comes you can profit mightily.
I have a personal list of companies that are ready to blossom when the restraints are removed from industry. It is there that I am looking for significant growth and expansion as well as advances in stock prices. Starting with the next president, we can experience the great growth of the Reagan era once again. Be ready for it.
Nothing contained in this article should be interpreted as a promise or guarantee of earnings or investment results nor a recommendation for the purchase or sale of any security or sector.
