Why Stock Market Pessimists Should Relax

Lately, an increasing number of doom and gloomers are sounding off. They worry about the sluggishness of the U.S. economic recovery, an increase in interest rates, and a decline in America’s place in the world, especially as China rises. They should relax.

Ditto for investment “experts,” who offer all kinds of silly advice. The so-called experts may or may not have gotten it right once in their investment careers, but that doesn’t keep them from trying to make the headlines. No matter how good things are, there will always be people making dire predictions. Sometimes, this even comes from people who have credibility, and it causes us to wonder how they got that credibility in the first place.

Recently, a well-respected market strategist, Societe Generale’s Albert Edwards, forecasted an upcoming global recession that will push stocks to the lowest level in decades. Wow, that’s really a big, bold prediction.

The market hasn’t gone down 10 percent for several years and a bull market correction of 10 percent could occur at any time. It’s even possible with enough negative sentiment to have a quick 20 percent downturn, but we simply don’t see it being sustained at this time. Nor do we expect another experience like the 2008-2009 slump, given the deleveraging that has occurred at both an individual and corporate level.

Cash reserves for both individuals and corporations are at record levels. The people you see on TV or you read in magazines or papers are either trying to make a name for themselves, or sell their newsletter or some other product.

It is only by maintaining a disciplined investment approach that you can potentially survive and hopefully prosper. Those that hung in there during the recent bear market racked up significant gains over the intervening five years. We know that these gurus always have a plan to avoid disaster; still, the reality is anybody can be right once, but it’s really difficult to be right every time.

Not too surprisingly, the Federal Reserve is steadily reducing bond purchases – and the loss of that stimulus provokes anxiety that interest rates are on their way up, which could squelch the tepid economic recovery. Members of Congress tried to pin down Fed Chairwoman Janet Yellen on when interest rates might rise. She replied that there is no “mechanical formula or timetable for when that will occur.”

However, she did comment that interest rates would remain historically low for a considerable time. In a previous appearance before the Economic Club of New York, she even hinted that rates might not increase until two years from now. For those who have adjustable rate loans or mortgages, this is extremely good news as the cost to borrow will continue at historically low rates.

What seems to be, seldom is. Recently, a survey from the International Comparison Program said that China was poised to soon surpass the U.S. as the No. 1 world economy. Using one very simplistic gauge, called purchasing power parity or PPP, that’s true:  This adjusts the prices of goods and services, which are cheaper in China, whose currency is under-valued. But this approach doesn’t add up.

China can buy very little using its currency, the yuan, which it must convert to dollars before it can purchase from its trading partners. In short, nobody wants the yuan. Using the standard dollar-denominated method, the World Bank figures that the U.S.’s GDP was $16.2 trillion in 2012 (the latest figures available), versus $8.2 trillion for China.

It’s entirely possible and highly likely that China will one day surpass the United States: Their yearly economic growth rates is 7.8 percent and ours is 2.8 percent. Yet the Chinese overtaking us is at least 10 years into the future and assumes they don’t have any major recession or significant slowdown.

Even then, China is not likely to surpass the U.S. on a per capita basis, as the American per capita GDP numbers are currently $51,749 compared with China’s $6,091. In light of all this, things aren’t looking too bad for us.

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Written by V. Raymond Ferrara, CFP, CSA, who is president and chief executive of ProVise Management Group LLC in Clearwater, Fla. 

This material represents an assessment of the market and economic environment at a specific point in time. Due to various factors, including changing market conditions, the contents may no longer be reflective of current opinions or positions. It is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Please remember that past performance may not be indicative of future results.

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