The Sky Isn’t Falling on Blue Chips

06/28/2011 11:30 am EST

Focus: MARKETS

Kelley Wright

Managing Editor, Investment Quality Trends

In this manic market it may seem like the end of the world...or you can at least see it from here...but there are still some very good investments that will pay off for a long time to come, notes Kelley Wright in Investment Quality Trends.

"Chicken Little was in the woods one day when an acorn fell on her head. It scared her so much she trembled all over. She shook so hard, half her feathers fell out. 'Help! Help! The sky is falling! I have to go tell the king!'"

In case you missed that day at pre-school, the fable of Chicken Little is a tale about a belief that the world is coming to an end. The phrase, “The sky is falling!” has now become part and parcel of the English language as a common idiom suggesting that disaster is imminent.

With the equity markets correcting over the last six weeks, we have a real-time example of how fickle investor psychology is, as well as their knee-jerk, often emotional reactions to economic and political news.

These emotions and reactions are not always to the downside, though—perhaps the phrase "irrational exuberance” rings a bell.

The simple fact is that markets have always followed a rhythm and cycle, an ebb and flow if you will; some observers refer to this as seasonality. This is how phrases such as “sell in May and go away” and “the summer doldrums,” to name two, become part of the investment fabric.

This is not to say that the markets and the global economy do not have their share of problems; by many measures, there is ample evidence that the economy is slowing. Of course, an economic slowdown, as well as the current correction in the equity markets, was fairly predictable.

This has nothing to do with being a bull or a bear. It is more about not missing the forest because of the trees. While cheerleaders are always more popular than skeptics, one did not have to be a genius to know that some of the catalysts that propelled the run-up in prices on the major indexes since last winter were temporary in nature: continuation of tax policy; the FICA holiday; QE2, and so forth.

Now that the chickens are coming home to roost, so to speak, many economists and financial pundits seem absolutely shocked that the US economy is slowing down again. It is as if this latest wave of bad economic data has caught them completely by surprise.

Today in the mainstream media, we are seeing all kinds of headlines declaring that the US economy is headed for disaster. But anyone with an ounce of foresight could have seen this coming.

This year alone, we have seen the worst tsunami in Japanese history, the worst US tornado season in recent memory, and the worst Mississippi River flooding in decades.

Okay, so is the sky really falling, is it time to panic, and has the US economy really fallen and can’t get up? Interesting questions and debate topics to be sure, if your focus is on the stock market and investing for the moment.

For market participants who are dependent on the news cycle and the next week’s economic release calendar, all it takes is one errant falling acorn to lead to a string of poor decisions. Without a long-term focus and strategy, corrective periods in the markets become signs of the approaching apocalypse instead of periods of opportunity.

This is why, for the enlightened investor, the focus is the market of stocks that are of exceptional quality and currently offer good value. They have come to understand that undervalued stocks often offer bond-like dependability of payments while also offering the opportunity for capital appreciation.

One can live off a steady flow of dividend payments that increase year over year. Or, if the cash is not a necessity, the dividend can be rolled back into that or other stocks through dividend reinvestment, to build more capital and increase cash flow from future dividends.

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