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Our Take: Panic Tonic

Don't get caught up in what you read - in a newspaper, research report...or even here!

Swept along by the powerful emotional undertow that trails doom-and-gloom merchants, one can quickly end up trashing both portfolio and career.

A few months ago, I opined that fleeing banking now is akin to selling at the bottom. A recent interchange hammered home how a cool head is every bit as essential for making wise career decisions as it is for making wise investment decisions.

A user on a career networking site had posted a question in which he despaired of ever being able to retire. "The middle class are quickly becoming lower class from a financial standpoint," he wrote. Meanwhile, his own finance career seemed to have hit the skids, and with competition for jobs so fierce, he feared he'd be unable to pick up where he'd left off. "Will I be a Walmart greeter at 65?" he wondered.

Transfixed by the Abyss

When challenged, he trotted out a laundry list of well-known information about what's wrong with the financial markets, the economy, banking and housing. Share prices, he predicted, will quite possibly "do nothing" for the next 10 years, leaving precious little chance for Generation X to rebuild retirement portfolios devastated by this year's swoon. In perhaps the most telling sign of his emotional state, this credentialed former portfolio manager warned the U.S. would likely endure both depression and inflation - apparently, at the same time. As Freud would have said: "How very interesting!"

I find it similarly "interesting" whenever I hear someone confidently predict U.S. stocks will produce meager returns over the next decade. As a sometime member and constant observer of the news media since the late 1970s, I learned the one point in time when both the public and media grow most fearful of a market "crash," is immediately after a crash has occurred. Likewise, now that the broad U.S. equity market has gone literally nowhere for a decade - in the 10 years ended Dec. 1, the S&P 500 index returned -0.933 percent annually, including reinvested dividends - it's no surprise to find many headline writers and readers asserting stocks will go nowhere for another 10 years.

Investment pros, however, have the tools to do their own thinking.

"When you look into an abyss long enough, the abyss looks back into you," Friedrich Nietzsche warned more than a century ago. When you find yourself facing the abyss, don't linger there. Step back from the precipice and take a few deep breaths.

Liquid Markets - Or Liquid Courage?

If the unrelieved downpour of bleak headlines makes you shiver, resist the urge to log onto LinkedIn and issue your own dark forecasts. Instead, find a seat where the view is nice, pour yourself a cup of chai and read a bit of poetry - or even a chapter of Gladwell, Taleb or Benjamin Graham.

I know soothing words could prove ill-timed now that the S&P has rallied 19 percent off its late-November low. For all I know, the Federal Reserve's liquidity injections that propelled that rebound might prove as fleeting as the more common version of liquid courage - the one dispensed by bartenders for centuries.

Nevertheless, I'll go out on a limb by citing a bond expert who believes the old saw, "Don't fight the Fed," is worth heeding today.

This week, the central bank took a major step toward reviving various troubled bond markets, says Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. By reducing the federal funds rate more than expected and signaling that its balance sheet will expand even more aggressively than it has thus far, Crescenzi says the Fed paved the way for both further declines in low-risk Treasury and money-market yields, and for a 30-year fixed mortgage rate of 5.0 percent or less. In turn, that would encourage investors to "move one layer out the risk spectrum," in Crescenzi's words - possibly renewing the appetite for investment-grade corporate bonds and ultimately, corporate equities. "Fighting the Fed's balance impossible for any investor," he concludes.

AUTHORJon Jacobs Insider Comment
  • Pa
    Patty Peppermint
    22 December 2008

    Agree with jo-jo. Only enjoyed Nietzsche quotation.

  • jo
    19 December 2008

    What a useless article!

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