Slowing Down Makes Sense

06/17/2011 8:30 am EST

Focus: MARKETS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

When the markets are looking for a sound footing, it's best to stay patient rather than force the situation, observes Jim Lowell of Forbes ETF Advisor.

As we near the end of the Federal Reserve’s quantitative easing, better known as QE2, I’m reminded of a real-world lesson taught to me by the other QE2—the boat variety—in the summer of 1992.

Back then, within eyesight and earshot of the little island where we hang our summer hat, the luxury über-ocean liner was in a hurry to get from one port to another.

When throttling forward, every captain I know of knows that your stern digs in, sometimes as much as doubling the draft (the distance between your hull’s bottom and the ocean’s bottom, a distance you never want to feel in your keel).

Well, the captain learned a lesson that day, running aground a sandbar and getting hung up for all to see. The marine radios came alive with chatter. Calls for towboats multiplied. But for those of us who knew the waters, the obvious call was for patience and high tide.

After several quarters of accelerating earnings and economic growth, I think we’re staring at one or two quarters of decelerating growth on both fronts. Not all at once; not consistently so—but in the end, after the intermittent highs and lows, just so.

Shaken as some may become in the months ahead, I still see nothing in the fundamental evidence that suggests we’ll turn from currently slowing growth to a whirlpool of no growth...and there’s plenty to suggest that if we do get a round of higher prices skidding to lower ones, those lower prices will lead back to higher ones before year’s end. Of course, I could be wrong.

I’m not discounting the problems that continue to dog what would otherwise be an unfettered recovery. Eurozone worries are building vulnerability back into the marketplace, even as the vulnerability of not being propped up by Fed easing is being priced in ahead of the actual end date (June 30).

China’s long-broadcast (and now manifest) orchestration of a slowdown is creating static for those who didn’t get the simple physics that I’ve been talking about for a year now: if the financial engine of the recovery slows down, all the cars in tow will likewise slow down.

As for the QE2, despite all the calls for towing help rather than staying the course, and despite the immediate frenzy of sinking-related fears, the tide swept in and lifted that bigger boat without so much as a towing bill to show for it.

Over the next quarter or two, I wouldn’t be surprised to find a few sandbars along our route to higher year-end gains. But, knowing they’re out there will help you know how to navigate thinner times and shallower waters.

Subscribe to Forbes ETF Advisor here…

Related Reading:

Related Articles on MARKETS