If it will fix itself, is it really broken?
"We are living in a new world – the world of a global capitalist economy that is vastly more flexible, resilient, open, self-correcting and fast changing." – Alan Greenspan, The Age of Turbulence
Capitalism lends itself to boom/bust cycles that often define our markets. In good times, some investors forget the relationship between risk and return. They become greedy and believe in the fatal words of the fictitious Gordon Gecko, "Greed is good", which leads to unhealthy market excesses. A never failing feature of our system is that excesses are ultimately exposed and in time the market washes them away. Sometimes the process is very painful and sometimes it takes longer than expected. But that is the cleansing process of our market and the way our economy regains good health.
The U.S. economy is incredibly resilient. Capitalism works and is the very foundation of our economic system; In the long run our economy is self correcting and self healing. One could argue that the markets are already well along in the process of correcting the excesses and the long term health and well being of the U.S. and Global Markets are quite attractive.
The checks and balances in our economy tend to work in remarkable ways, for example:
- High oil prices will lead to conservation, innovation, new supplies and ultimately lower demand and lower prices.
- Lower global growth rates will lead to lower demand for all commodities, bring their prices down and the cost of goods generated from raw commodities will also decline.
- Lower economic growth rates here and abroad will lead to lower expected inflation and interest rates, setting the stage for recovery.
- The weak dollar will reverse course as foreign buyers demand more dollars to buy U.S. goods, now selling at discounted prices on world markets.
In the short term we are likely to be challenged even further as there will certainly be more bumps in the road to recovery. With that said, here are a few guiding principles to assist you in understanding market cycles:
- Media noise can be difficult to ignore but you can avoid the fear and extremes often promoted. Let history be your guide. In the past, markets have always risen given a long enough timeframe.
- Focus on what you can control. You can control the quality of the investments and the diversification. Broad diversification can assist in mitigating the adverse effects brought on by the current Macro-economic events.
- Asset allocation and diversification are paramount.
Investors who consistently practice sound investment principles and maintain a long term perspective will, in my view, survive the current setback and in the long run enjoy the results as this market regains solid footing once again. Keep in mind that these times can present long term opportunities to buy great investments at lower prices.
Yes, large declines in market value can be unnerving but ups and downs are a normal part of the investment cycle. Wall Street is fickle and the mood can change quickly. We must trust in our economic system. History has taught us that we will exit from this down cycle with a market and economy that is both healthier and stronger. It is the steady handed, stay the course investor that will reap the rewards of patience.
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