Photo by Agamitsudo: http://commons.wikimedia.org/wiki/User:Agamitsudo
Why is the US stock market going up? And up, and up... and continues to climb. Week after week history repeats istelf: Wall Street keeps reaching new peaks, one after another. But how can this be if an economy as important as Europe’s is experiencing an ongoing crisis?
As Catalan investors, our vision of everyday reality is the main impediment that we face when we think about investing our savings.
It is true that in Barcelona, trying to get a table for dinner without a reservation is an impossible mission every weekend. But it is also true that the crisis is continuing, something that people have been noticing for years when they dig in their pockets. Moreover, it seems that the crisis is gradually worsening, while stock prices continue to increase on Wall Street and in most of the stock markets worldwide.
When we decide to invest our savings, first we need to have two things in mind:
1. Global vision. What happens in Spain stays in Spain. Spain may be in crisis, but the rest of the world spins on.
2. Knowing how this financial market circus works. No matter how rational and well-thought out our calculations are, the stock market will continue to surprise us. This means we become highly irrational in many cases.
At the same time, when we approach the stock market we must ask ourselves the following question:
Are we here to be right or we are here to make money?
I think if I make money, I won't care if my predictions are correct or not. While investing I hope to gain, even if my correctly reasoned arguments tell me that it isn't the moment to do it.
Here is an example:
Last week, during one of the trading sessions, stocks didn't decrease when three economic reports came in under estimates (Jobless Claims, Housing Starts and Philly Fed).
The answer is the QE, the Quantitative Easing made by three central banks: the Federal Reserve (Fed), the Bank of Japan, and the European Central Bank.
That is the only thing that matters to investors these days. That's why stocks tanked on the mere hint of potentially lower bond buying in the future from one of the Fed's representatives. US stocks fell when Federal Reserve Bank of San Francisco President John Williams said that the increased pace of economic growth may prompt the Fed to reduce its $85 billion in monthly bond-buying. However, a few hours later, the US Stock Market reached new highs.
We are all keenly aware that QE is not a permanent fixture, and that it will be removed when the economy can withstand it. So for stocks to drop that fast on that one obvious statement is laughable.
QE will be unwound very slowly, and the central banks will only continue to remove it if the economy remains stable and growing. A stable economic environment is generally conducive to stock advances.
During the recent weeks, I've been recommending to my clients more and more positions in the Stock Market, from the US to Japan (read more about this on my blog). That includes several mutual funds investing in different securities: the US stock market main index (S&P), financial companies worldwide, the US Biotechnology sector, Southeast Asian companies, and Japan's main index (Nikkei). Specifically, I have suggested that clients distribute 75 percent of their portfolio in these areas.
The remaining 25 percent should be invested in Fixed Income (Bonds) from Emerging Market governments. We are actually investing there through mutual funds made up by bonds from countries such as Mexico, the Philippines, and Malaysia.
So if you are not already investing in the stock market (avoid IBEX 35), what do you expect? There are just a few markets (in Russia and Spain) that are not doing as well as the main markets. They may be a great option in the future, but not at this time.
For any questions, avoid ignorant advisers from the office next door—they won't call you when the bubble is ready to explode. Instead, keep in touch with advisers with an overview of the global financial market: from Barcelona to San Francisco, and from San Francisco to New Delhi.