Larry Halverson: I've Been Thinking

Interesting week in the markets, huh? Tuesday’s stock market downdraft was triggered by one of those impossible-to-predict but inevitable “external shocks” – this one being a nearly 10% drop in mainland China’s stock market in response to fears of increased government attempts to slow their economy. That shouldn’t have been that big of a shock, but add the uncertainty in the U. S. housing market, utterance of the “R” word by former Fed Chairman Greenspan, and some very mixed economic reports and you have the stuff of a market correction. In fact, it produced the biggest point drop in the Dow since the day the markets reopened after 9/11/2001.

I was traveling when this latest sell-off occurred – presenting our economic and market outlook to various groups of credit union boards, managers and members in the Gulf Coast area (which, by the way, is coming back very strongly in most areas, but still bears many highly visible scars from the 2005 hurricanes). The conclusions in my presentation:

• The U. S. is overdue for setback/consolidation (or at least volatility) in our economy, bond markets, and stock markets
• An economic “hard landing” (recession) appears highly unlikely (barring a significant external shock)
• Our interest rates are attractive to foreign investors (as long as the dollar’s decline is only moderate)
• Our stock valuations are reasonable (as long as earnings hold up)
• The global liquidity glut has to go somewhere, and although more and more will go to other nations, we do capitalism best and our markets will continue to get support from foreign investors.

My recommendations ended with:

• Be prepared to see a modest U. S. and global slowdown, increased investment market volatility, but about historically average investment returns.

It appears we’re getting the first two – a modest economic slowdown and increased market volatility. We’ll have to wait awhile to see if we get the third – decent returns – over the next several quarters. And this, of course, will depend on the impact of the next unexpected event, and the next one, and . . . you get the point. But, that’s just part of investing, and of life in general, right?