Ignoring the Good News?

When headlines and commentary from main stream media seems obsessed with the negative and sensational---“falling off the fiscal cliff” and “collapse of Europe” for example, a careful review of all sources of NEWS gives a different picture with headlines from different sources:

11/9 “Wholesale sales up in USA more than 4.4% YOY”

11/21 “HSBC China PMI at 13-month high of 50.4 in Nov”

11/21 “Housing starts in America rose by 3.6% to 894,000 in October, the highest in over four years”

11/22 “Mark Hulbert: Insider behavior points to imminent rally”

11/29 “World Economy in Best Shape for 18 Months, Poll Shows”

11/30 “Corporate Profits highest in History”

Link to FRED

As I’ve indicated previously, be prepared for markets to move up and down a lot as headlines focus on comments from political figures prognosticating about the Fiscal Cliff and the European Economy.  But also as I’ve mentioned previously, stock markets are ultimately driven by corporate profits and as can be seen in the chart above---the trend is UP, UP, and UP.  Certainly that trend will reverse at some point—that is what is behind the fear of the Fiscal Cliff and the situation in Europe—the fear that this upward trend will turn downward.  But considering that profits are up 300% over the past 10 years and the S&P500 is up only 50%, it is highly probable that markets are presently undervalued and that we have a ways to go before we see a major drop in markets.

We all know that sooner or later, taxes are going up and the growth of government spending will be restrained.  Government deficits cannot go on forever. The situation in Europe and political struggles in the US are all about this process.  While in the short term, the implementation of actions to reduce those deficits may restrain economic growth—in the long run, these actions are positive. The size of the Fiscal Cliff and European Austerity do not make me fearful--they only bring attention to the enormity of the real problem--continuing large government deficits that cannot be sustained. Big Government is scary, but Big Government running on borrowed money is terrifying.

The real potential economic pain over the long term will not come from actions that reduce government deficits, but rather from political inaction that allows these deficits to continue unabated. I pray for the wisdom and courage of our elected leaders.

For now, I'm still indicating that for long term investors, staying the course for now is probably the best course of action.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.

As a service to my clients, links to articles that go with the headlines are available at my “with permission only” Twitter site:  @waynestrout  https://twitter.com/waynestrout  When encountering any comments there thought to be political, please consider I am a politically conservative Independent. I believe in small government strong enough to protect individual liberty and active enough to promote general prosperity; personal responsibility and personal liberty; a strong defense but with a reluctance to make war; and a compassionate Christian based (Love thy Neighbor) charity toward the disadvantaged.