Published June 20, 2012
If you were to have dropped out of a spaceship and told to quickly evaluate the world for the best place to invest in stocks today, your fundamental analysis would drive you to the United States.
Based on the historic low rates on Treasuries, relatively high earnings expectations for public companies and high dividend yields, some could argue very convincingly that stocks are selling at a 35% discount.
All of our textbooks tell us that, given where interest rates are currently, and if earnings forecasts remain strong, we should probably not only buy stocks but also leverage up 20% and buy even more on margin. Many bulls will argue that this is a perfect scenario for being an aggressive buyer.
However, we weren't dropped in from a spaceship (although I have met some folks recently who I think do come from outer space). We are in a global economy where more than 50% of the S&P 500 companies derive a majority of their earnings growth from outside our borders.
What is happening today does matter to you here in the U.S. Often times I am amazed at the headlines from around the world. Think about it -- we aren't discussing if countries are hurting economically, we are discussing if these countries will even remain intact. Unbelievable.
These headlines have given rise to individual investors being too scared and too gun-shy to invest, which is understandable. But individual investors need to see through the headlines and reflect -- how are they going to keep pace with their rising cost of living? Money market and fixed- income might feel good in the short run, but in the long run they guarantee you a loss of purchasing power.
That’s right -- after inflation and taxes you have lost purchasing power for the most part and will continue to, especially if you initiate an investment in bonds today.
The only way, historically, to offset the rising cost of living over the long run is to own stocks, real estate, businesses, etc. In a short period of time anything can happen. As an investor you need to determine if you have faith in our world markets rebounding -- or if you will let fear override you and keep you on the sidelines, guaranteeing you a loss of purchasing power.
No one knows how severe the downturn is or how long it will last. Having faith has always been rewarded, though, and if you look over the long run, your faith in the global markets will be rewarded again.