With the market pulling back sharply over the last four weeks from recent all-time highs, we think it a fine time to remind folks that through the years there have been numerous geopolitical issues, economic downturns and market declines that have scared off fair weather investors. Just in my 27 years at Al Frank, we’ve witnessed Black Monday, Iraq 1, the collapse of Long Term Capital Management, the Asian Contagion, Presidential Impeachment, theTech Bubble, 9/11, Accounting Scandals, Iraq II, the Housing Bust, the Great Recession and the Flash Crash, to name a few events that have caused consternation.
No doubt, the additions to the Wall of Worry over the first three quarters of the year—the slowdown in economic growth in China, the continued near-recession in Europe, the drama in Ukraine/Russia, the contraction in Q1 U.S. GDP, the debt issues in Argentina, the hostilities in Iraq/Gaza and the Ebola scare—have provided plenty of fodder for the Doom and Gloom crowd to convince fearful money to stay sidelined, but we remain optimistic on the balance of 2014 and beyond. This is the case, even as we could arguably add quite a few new bricks to the Wall of Worry just by perusing the news over the last few weeks…
- Durable goods orders plummet
- Existing home sales weaken
- Treasury works to curtail “inversions”
- War on ISIS underway
- Russia remains a wildcard
- Alibaba IPO euphoria
- Eurozone economic data deteroriates
- China apparently chooses not to stimulate
- Commodity prices sink
- Dollar rallies
- End of Fed tapering imminent
- Retail sales disappoint
- Volatility spikes
We are not cavalier in our lack of grand concern for the latest events, as we know that short-sighted traders can send stocks sharply lower very quickly and understand that the current downturn could extend into correction territory, but we think it is far better to stay on course with one’s long-term investment objectives than to try to time the gyrations of an often schizophrenic market.
We never lose sight of the admonitions of Peter Lynch and Warren Buffett, the former stating, “The key to making money in stocks is not to get scared out of them,” and the latter reminding us, “The stock market is designed to transfer money from the active to the patient.” Of course, we also know that equities have generated handsome returns on average dating back to the 1920s, so the odds have historically been in the favor of the stock investor. (As always, we must remember that past performance is never a guarantee of future returns.)
Though Ebola news on the domestic front calmed a bit over the weekend, the death toll in West Africa continues to rise and we understand that it is nearly impossible to quarantine a continent. Obviously, we are a long way away from finding a cure for the disease and it would seem that U.S. healthcare officials are only beginning to get their arms around the treatment and containment protocols. Hard to imagine that developments related to Ebola won’t get worse before they get better, but we do not think that there will be a long-term impact on the equity markets. After all, stocks have already survived HIV, SARS, Avian Flu, Swine Flu and a host of other ailments. Indeed, capitalism’s immune system is quite strong.
Interestingly, it would seem that Wall Street pros were far more concerned about the recent downturn than folks on Main Street. After all, the latest sentiment survey from the American Association of Individual Investors (AAII) saw a 2.7 percentage point increase in the number of optimists to 42.7%, compared to the historical average of 39.0%. Perhaps, retail investors really are heeding the advice of the Oracle of Omaha who states, “As far as I am concerned, the stock market doesn’t exist. It is only there as a reference to see if anybody is offering to do anything foolish.”
To be sure, the latest swoon is the worst we’ve seen since 2012, and the average stock lost far more than the 7.3% negative return of our benchmark Russell 3000 index from September 18 – October 16. And, believe it or not, the average stock actually was down in Friday’s trading, as the Russell 2000 small-cap index dropped 0.35%, even as the Russell 3000 advanced 1.14%. Still, given the 36%+ returns enjoyed by our newsletter portfolios in 2013 and the 14%+ gains turned in during 2012, those who have a long-term investment time horizon are hopefully taking the resurgence of volatility in stride.
Obviously, it is no fun to have surrendered the modest gains that had been posted earlier in 2014 and we know that we still have two weeks to go in the seasonally weak September-October time frame…
…but we remain excited about the long-term prospects of our broadly diversified portfolios. Reasons for our optimism include: many stocks are now 5% to 10% or more less expensive than they were just a month or so ago (valuations are less worrisome), dividend yields have moved higher (Buckingham Portfolio now yields 2.8%), interest rates have skidded lower (the 30-year Treasury now yields 3.0%), investor sentiment is hardly enthusiastic (domestic equity mutual fund flows remain negative), central bankers around the world have renewed reason to focus more attention on aiding economic growth than on fighting inflation (we heard as much last week from both ECB President Mario Draghi and St. Louis Fed President James Bullard) and domestic economic growth appears to remain solidly on track.
One stock we recommend adding to a broadly diversified portfolio is Baxter Int’l (BAX). The company develops, manufactures and markets products that focus on hemophilia, immune disorders, infectious diseases, kidney disease, trauma and other chronic and acute medical conditions. While the firm’s biopharma and medical products businesses will split in two in 2015, we believe that competitive advantages should remain strong, supported by the fact that more than two-thirds of Baxter’s revenue is generated from market-leading products. With BAX shares down in price on the year, we like the sizable upside potential going forward.
First published in Forbes.com
