Fundamentals Eventually Win Over Fear

What do you do when the volatility in the stock market acts like a roller coaster? Where do you invest your money?

The stock market is on a wild ride and the bond market remains expensive with extremely low yields.The 10 year Treasury bond is yielding 2%.The S&P 500 Index is yielding 2%.

2011 is still a recovery year for the economy.We started out with high unemployment and excessive residential homes for sale in a low interest rate environment.All of those factors do not improve at the same time but there have been other factors that have improved.Corporate earnings for 2nd quarter came in with double digit year over year growth along with corporate sales growth.If corporations are growing and making money someone has to be spending.Retail sales have been improving including auto sales rebounding from Japan’s earthquake disruption.Personal Income is climbing albeit slowly and consumers have begun to deleverage in a healthy way.So why is the market down year to date and moving like a roller coaster?Fear of the unknown! Trust is an issue in both Europe and the US political divisions and there is presumption of a recession.Investors want resolution and all the economic indicators do not show we have resolution so the unknown arouses panic and sell offs take place. Traders are making quick money with today’s technology of electronic trading and margin trading, day traders are active.This is a short term strategy.Panic selling tends to lead to underperform in ones portfolio because who knows when to buy back in.Once the rally holds and takes off, being out of the market misses the first round of price upswings.Just a hint of a better economic outlook and the equity market will have a bounce to the upside.Remember, your asset allocation should complement your overall objective.

I believe we are in a stock buyers market. The S&P 500 Index pays you 2% plus appreciation while the 10 year Treasury bond will pay you 2% and only 2% for 10 years.I would rather own the Index and reap some appreciation along with income.Individual stock names can pay two times higher dividends than most bonds. Emerging Markets Index also pays 2% with higher growth expectations than the US market.As always, remain disciplined and lock in some profits along the way.

Fear is an emotional reaction that should be taken out of the equation when investing.Details behind the announcements especially in wild roller coaster rides are most important in today’s investment environment.The economic weakness does not mean all the fundamentals have a negative sentiment.

Good luck and know what you are invested in.

By | 2011-09-22T18:34:07+00:00 September 22nd, 2011|Categories: Money Basics|Tags: , , , |0 Comments

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