In a recent column about central banks rescuing struggling economies, Joe Calhoun at Real Clear Markets discussed the crippling¬†effects of ceaseless monetary stimulus.¬†Indeed, the activity is frequently correlated with sub-par economic growth and¬†an erosion of purchasing power (a la inflation).
However, Calhoun takes his condemnation of interventions by central banks (U.S. Fed, People’s Bank of China, European Central Bank, etc.) one step further.¬†He laments the circumstances as being¬†horrific for the long-term valuation of corporate stock assets because “weak growth limits the top line and inflation ultimately erodes the bottom line.”
Here’s where I depart from Calhoun’s simplistic assessment. First of all, stock valuations don’t mean a hill of pinto beans when irrational exuberance (e.g., 1996-2000) or walking-dead pessimism (e.g., 2009-2012) are in play. In both instances, analysts justified overvaluation and undervaluation arguments based upon different P/E varietals; in¬†both instances,¬†regardless of P/E assessments, stocks appreciated dramatically.
Should investors not have sought to profit from the late 90s “New Economy” hype because it was irrational… or should they have rode the¬†wave with a sensible and highly liquid exit strategy?¬†Unequivocally, it is the latter. Should investors have walked away¬†from¬†central bank reflation of¬†stock assets that has seen the Dow double in value since 2009… or should they have participated in stock price¬†gains with¬†an exit approach?¬†Investors have to be able to take advantage of stock uptrends if they wish to achieve their financial goals… period.¬†
Secondly, P/Es are often meaningless when major benchmarks fall below and stay below significant moving averages like the 200-day. You can try to catch a falling knife and talk yourself into a deep discount value methodology, yet history has been kindest to those who managed risk by¬†taking profits¬†or small losses. Anyone who understands bear market math recognizes the¬†immensely positive outcome of¬†a small loss relative to¬†a big one. For that matter, anyone¬†who has ever needed to use a catastrophic insurance policy (e.g., health, auto, homeowner, property, professional liability, etc.) recognizes that a small premium can often be the best money one ever spends.
Third, while¬†the U.S. Fed’s easing¬†has not genuinely succeeeded¬†in increasing the willingness of corporations to hire, it has given companies the ability to refinance their debts, shore up balance sheets, have cash on hand to survive a¬†credit crunch as well as¬†invest modestly in¬†ways to grow their businesses. Would we rather invest in cash-strapped,¬†debt-heavy companies at P/Es of 18 in 2007 when the S&P 500 hit 1565 or would we rather invest in¬†streamlined,¬†recession-ready¬†juggernauts with P/Es of 14.5 in 2012 when the S&P is at 1435? Again, the latter is far more¬†palatable. (Note:¬†This is a theoretical question pertaining to the¬†current state of corporate P/Es levels; personally,¬†I expect markets to pull back¬†in September and/or October.)
By the way, I am hardly in favor of more quantitative easing¬†by the U.S. Fed when Congressional leaders could be working with business leaders instead. I’m still waiting for the day that Republicans and Democrats stop trying to negotiate with one another on how to revive the economy when they should be talking with business leaders. Ask each and every one of the CEOs of the S&P 500 what the government can do for them to spur new jobs, collect¬†ideas that¬†would¬†make it¬†through the legislative process¬†and watch both government and business thrive.
Political thoughts notwithstanding, we’re investing in the success of companies through¬†stock shares. Many of them have dividend yields¬†that¬†are greater than the 10-year treasury, and quite a few of those are not¬†particularly affected¬†by economic cycles.¬†For example, I hold ETFs like iShares High Dividend¬†Equity (HDV) for the large exposure to pharmaceutical dividend payers. I¬†may not be buying more today with cash, but I would likely buy more¬†on a stock pullback that doesn’t breach¬†support at the 200-day trendline.
The fact remains that while Mr. Calhoun may be bothered by the¬†probability that¬†global monetary policy¬†is distorting asset prices (a.k.a. reflation),¬†one has the ability to invest for more than wealth preservation alone. On stock pullbacks that do not cross below the 200-day, picking up Vanguard Dividend Growth (VIG) is a way to benefit from¬†reflation. You may even choose reflation¬†performers like Vanguard REIT (VNQ),¬†iShares Gold (IAU)¬†and/or¬†iPath DJ UBS Commodity ETN (DJP).
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Disclosure Statement: ETF Expert is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.