I’m not convinced that we’re out of the woods yet. These markets still appear to be expensive. Here’s why:
- Midterm elections are around the corner. If the Democrats win, U.S. politics will be deadlocked for another two years.
- By next spring, earnings growth won’t have the benefit of tax cuts. From what I’ve seen so far, earnings growth for most U.S. companies is at 0 to 10 per cent when not accounting for tax cuts: That’s average at best and not as stunning as many analysts tout.
- Emerging market issues have reduced growth for U.S. multinational companies. This is especially those in the technology sector. The same thing occurred in 1997 during the Asian contagion which preceded the bursting of the tech bubble in 2000.
- The Federal Reserve should continue on its rate hike policy through December. Rising short-term rates pressure companies as they operate by borrowing in the short-term markets. This slows down their capacity to hire, innovate and acquire.
- Wages are quietly rising. The news today was that salaries rose just over 3 per cent. Rising wages is something else corporations have to deal with on the cost side of their businesses.
So what’s an investor to do?
- Stop trading and start investing. Share prices are only important when buying and selling. This is similar to your home: The only time its price is relevant is when you buy it or sell it. Since two-thirds of all long-term performance come from rising dividends and the re-investment of those dividends, investors should focus more on the rate of dividend increase, not the stock price or the current yield. Trading actively just pays for your broker’s retirement, not yours.
- Hold some cash and wait for better opportunities. In the past decade, it’s been a successful strategy to buy on the dips. But those investors haven’t seen markets like 2008, when buying on the dips could have bankrupted you because the market kept trending lower between December 2007 and March 2009. The cash-on-hand is to buy after a big correction (20 per cent or more), when valuations get cheap. While the market dropped significantly in October, it still hasn’t made it back to where it was at the end of September.
- Think about portfolio structure and have a plan in place. Now is the time to have a diversified portfolio to avoid correlation risk (too many names in the same sector) and concentration risk (too much ownership of one stock).
- Be patient and unemotional. Emotional investors sold at the bottom of the market in 2008 and never returned. They missed the best 10-year bull market in our lifetime. Be more practical instead, like Warren Buffett. Be an investor in a business, not a speculator, and let the dividends grow.