6 Down Weeks in a Row

I feel that the markets are taking a breather here and am hopeful that the stock market will be higher at the end of the year. It’s not unusual that the economy has slowed after the flooding in the Midwest, the Japanese earthquake, tension in the Middle East and rising oil prices. On top of the known factors, we have Washington playing a game of chicken with the debt-ceiling which isn’t fun to watch. I do not think that we are headed for a double-dip recession and believe the stock market is correcting alongside disappointing economic data. The one benefit of all the noise that investors are listening to is that investor sentiment, typically a contrary indicator, has been overly optimistic for quite some time and now the tide has turned which may be good news for the stock market.

Stocks have risk which we know and understand, but most investors don’t realize that fixed income investments have a different kind of risk. Now is not the time to flock to US Treasuries as a safe haven. If interest rates do rise (which won’t happen until unemployment shows a drastic improvement from the 9% + levels that we have now)  then a bond’s principal value will fall and investors will feel the same losses that they are afraid of by being invested in stocks. At this time, I prefer stocks over bonds except for corporate bonds, emerging market currencies and high-yield bonds. US stocks should do well compared to European countries that are sorting out the problems of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and I still like emerging markets (especially China and the Pacific Rim) which have been hit hard lately.