Since the end of the bear market in 2002, we have had double digit annual growth in sales, earnings, dividends, and market prices as measured by the S & P index. During all this time, according the Federal Reserve numbers, the inflation rate has averaged only about 2% and interest rates have remained in a very narrow range at the low end of the spectrum. It has been a great ride but everyone knows that it cannot last forever.
Don't get accustomed to it
All of the progress has come during a time in which we experienced constant terrorism fears, wartime expenses, rising short-term interest rates, an oil-price melt-up, shake-ups in political leadership, incessant hurricanes, and an increasingly weaked dollar.
It is a tribute to the strength of the US corporate economy and to the liquidity of the American investor that this market has lasted for four years. Corporations have been thrifty and calculating in their every move. Investors have been holding onto hoards of cash in fear of a return of the ill winds of the bear market.
Given all the outside forces that always threaten delicately balanced economies, there is always reason to be alert. With the recent level of the market and the risks we have been living with, the alert level should be raised. Double digit growth is not forecast this year. Inflation is rising and the margin of debt in brokerage accounts is as high as it was in February of 2000 when the market peaked. There hasn't been a market decline in several months and there hasn't been a significant International scare in some time. We could be overdue for some correction.
Let's not be foolish
The market isn't overpriced. In fact, it is slightly under the historical average of price to earnings. And, earnings are expected to rise a little this year. Interest rates are still low enough to allow economic progress and inflation is not likely to run away. It is something like preparing for a winter in Texas instead of Montana.
Preparing for winter in Dallas we check the furnace, wrap the outside pipes and order some firewood. That is about it. A properly allocated investor will check his cash needs for the next few months, make sure that any money needing to come out of stocks and funds has been liquidated, and make sure that any aggressive investments are minimal. Everything should be of good quality.
One never knows when a decline will come. In fact, many times, a decline will start after the market makes a glorious upside spike. We could even have that happen this year. However, as I said earlier – we might should raise the alert level.
L. Dean McGowan, Sr. V. P. Investments, UBS Financial Services 5080 Spectrum Dr. Ste 1000W, Addison Tx 5001; Ph 972-450-4322: From U S & Canada, 1-800-288-1515; From Mexico 001-800-010-1323.
Dean will be in Guadalajara Feb 22 and 23rd at the Holliday Inn Select 3-122-7575 and in Ajijic Feb 22nd thru March 1st at the Nueva Posada 766-1444.
An investment workshop, open to all, will be held at the Posada on Tuesday morning 10: to 11:30.
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