Why You Should Be Terrified By Richard Gibbons February 24, 2007 Economy, how do you frighten me? Let me count the ways.
Despite a recent string of pauses, the Fed has been raising interest rates over the past year, which can be a precursor to a bear market. The yield curve is flat, bordering on inverted, which often foreshadows a recession or even a depression. There might be a housing bubble (or there might not be, or there might be). Consumer spending has been driven by people cashing in on the cheap equity in their homes. Who knows what will happen if housing prices fall, reducing homeowners' equity and their ability to use that equity to buy new gadgets from, say, China? Consumer debt ratios are already at all-time highs. And then there's the dollar. We're running record budget deficits and record trade deficits -- meaning that other countries are lending us money so that we can sustain our lifestyle. If they pull the plug on us, we could face a plummeting dollar -- likely resulting in inflation, stock market troubles, and a real decline in both wealth and income. (Wow, I haven't even mentioned war, terrorism, oil, derivatives, secular bear markets, hurricanes, or Sith Lords.) Luckily, what's bad for the economy isn't necessarily bad for investors.
Pulling the wool The media loves to focus 90% of its attention on these issues because they're exciting. But when it comes to investing, they're less than 10% of the story. Ours is arguably the most resilient country on the planet. Last century, we faced World Wars I and II, the Cold War, the Great Depression, the failure of numerous banks, the impeachment of one president, the resignation of another, an oil shock, interest rates rising from 2% to 15%, several stock market crashes, and, of course, disco. We didn't just survive -- we overcame these challenges and prospered (and danced).
These macroeconomic issues are scary. But instead of being overwhelmed by the impossibly complex big picture, narrow your focus to individual companies. The market does not dictate your portfolio's performance; that's dictated by the performance of the stocks you own. Even in a bear market, some stocks outperform. Your job is to find those stocks and snatch them up.
"Despite a recent string of pauses, the Fed has been raising interest rates over the past year, which can be a precursor to a bear market. The yield curve is flat, bordering on inverted, which often foreshadows a recession or even a depression"