I'm having a hard time taking all the recent economic optimism seriously -- and apparently, given his performance Monday, so has Mr. Market.
For one thing, those "green shoots" everyone has been talking about seem to be withering fast:
mortgage refinancings -- which had been trending up for a while -- may have peaked in April. May numbers were significantly lower.At 9.4%, the unemployment rate is at its highest in more than 25 years.Gas prices are back up -- a lot.Americans are responding not by spending money to stimulate the economy, but rather by paying down debt at a record rate, and saving more, too.In other words, we still look stuck in a vicious cycle. And this isn't just an American issue -- recent economic reversals in Japan, China, and Germany point more toward an ongoing global recession than a recovery.
So why did the market rise 40% in the last three months?
People want to believe
As the study of behavioral finance has shown us, the markets are hardly ruthlessly rational machines. But they are a fascinating place to study human psychology. In this case, I think people could only take so much bad news. Once the specter of economic Armageddon started to fade even a little bit, people jumped right back in. Folks wanted to believe that the worst was behind us.
It may yet turn out that the worst is behind us. But going from "terrible" to "really bad" doesn't constitute a recovery.
So how do we make money in this?
The easy answers -- at least from my perspective -- are these:
intrinsic value gives you a lot of upside potential with (hopefully) limited downside risk.Buying stocks with solid dividends gives you some level of nearly assured return (like buying a bond), together with the benefits of owning a stock, which is more likely than a bond to appreciate in value over the long term.The benefit of both of those approaches is that they both ease concerns about the market's short-term gyrations. Value-priced companies aren't as likely to decline a whole lot, and even if they do, it's easier not to worry about them when you know that they're already a bargain. And when you reinvest dividends, a market downturn can actually work to your advantage, as your reinvested dividends buy more shares.
Combining these approaches can give you the best of both worlds. It does take some digging to find stocks that fit both criteria, but they're out there. Take a look at these stocks:
Stock
CAPS Rating
Price/Book Ratio
Dividend Yield
Compass Diversified Holdings (Nasdaq: CODI)
*****
0.60
15.9%
Coca-Cola (NYSE: KO)
****
5.37
3.4%
Fairfax Financial Holdings (NYSE: FFH)
****
0.99
3.2%
AT&T (NYSE: T)
****
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