Keep Bilging and Paddle Like Hell

09/11/2012 9:15 am EST

Focus: MARKETS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

The markets and the economy are coming around, but we're still in a precarious spot, and the goal is to stay afloat and make as much headway as we can, observes Jim Lowell of Forbes ETF Advisor.

Hope is like a leaky raft. Even in the best of times, hope doesn’t float on its own. It needs to be inflated and then re-inflated time and again...otherwise it deflates and you sink along with it.

Dateline Cuttyhunk: A remote island just enough in the mainstream to still offer the opportunity of perspective. From the docks, I can see that the inner and outer harbor’s moorings are chock full of sailboats big enough to house a family of four or more.

Each boat costs more than a few Benjamins to purchase, let alone outfit, store, commission, step, and launch...thousands upon thousands of dollars just to get from dry dock to ocean, and then thousands more to keep each boat rigged, stocked, and moored.

You’d think that was a bullish sign, if ever there was one. And, if you were a boat seller, you’d rest (a bit more) assured of your chances to net your asking price, or at least a better price than you could have hoped for a year ago.

But out on the water, you need two oars to row straight, and in terms of economic signposts, the second oar has gone missing from these docks. That second “oar” is motorboats, equally as consumptive of one’s hard-earned coin to purchase, store, and launch, and there are additional cost factors: gas or diesel around $4 or more per gallon and the $2.50 per foot per night cost of the berth away from home.

The docks are as empty of these as in 2002 and 2009, when in the aftershocks of market nosedives, even the most bullish patriot was bearish on any investment that came with additional costs attached.

So, you would think their absence was a bearish sign, if ever there was one. As a boat seller, you’d be down in the dumps. But if you’re a boat buyer, you’d rest assured of your chances to net your bidding price, or at least a better price than you could have hoped for a year ago.

Now, if I think of the slow and steady sailboats as bonds, and the faster, rougher-riding motorboats as stocks, then on a valuation basis I’d be a seller of the former and a buyer of the latter, plain and simple. Of course, you don’t buy a sailboat or a motorboat based on price alone; some prefer the leisurely pace of the wind to the whine of propellers. And, yes, a boat is not an “investment,” but a hole in the water into which you pour money.

But, like the marketplace writ large, fund flows continue to reflect that people are buying where prices are high and rising for the sake of what they think will be smoother sailing, and selling where prices are low and where the fear of taking a pounding remains high.

One thing is sure; there has never been a better time to buy a motorboat...all it takes is being hopeful enough to believe you will have your job long enough, that the economy will recover measurably enough, and that the market will grow reasonably enough over the span of the next few years to make such a purchase smart enough.

These days, for boat buyers and stock investors alike, that’s easier said than done. The fact that on a total return basis, the Dow Jones Industrial Average hit an all-time high around mid-August, and that we have been enjoying a nearly four-year bull market for stocks, hasn’t swayed sentiment or confidence in stock investing much.

Over the span of one of the better bull market runs in stocks, most investors were sellers, not buyers. And with election year fulminations upon us, fear, uncertainty, less hope—if not outright hopelessness—are on the rise, based mainly on a hysterical, not historical perspective.

Slow Spending Is Not No Spending
Retail sales have slowed down a bit ahead of the back-to-school spending that I think will be, as noted in last month’s issue, relatively strong.

While retail sales are volatile month-to-month, the long-term trend bodes for a range of constancy that is net bullish, not bearish. Consumers are often thought of as an unthinking herd, but you can see the toll a recession takes as the majority do the right thing by choice or by force, and pull in their spending horns.

This time around, with the protracted mood remaining one of fear and uncertainty, and absent tens of millions of formerly better salaried and employed consumers, the retail spending data is among the most bullish indicators that consumers are neither down nor out.

Home Improvement
One major driver of the past bull market was construction and housing, from the jobs they created and the spending they engendered. We are now seeing signs of what I have characterized as the first few planks of a floor being put under housing prices and sales.

There is still plenty of inventory to burn off in the most beleaguered locations. And there may even be a secular change in the way home ownership is viewed and pursued. But we are seeing evidence that in terms of prices and new and existing home sales, home improvement is the trend. We are also seeing signs of consumers spending to make their current home nicer.

Job Market vs. Stock Market
Employment is viewed as a lagging indicator, and for the most part it is. But as you know, I view it this time around as more of a coincident indicator—improving along the lines of the economy, not after it.

All the windage on big government not cutting enough and the private sector not hiring enough is accurate enough, but the nascent trend of private-sector job creation, and the trend of reducing government jobs, is a healthy one, though far from the scale needed to grow an economy at a healthy and sustainable pace. But you can’t just ignore that a healing process may have begun.

Unemployment is another headline that has served more head fakes than facts. The trend is an improving one, albeit that tens of millions of formerly fully employed, higher-salaried workers have opted out of searching for a new job or have taken lower-paying jobs. Still, even here, I think the trend is an investor’s friend.

And finally, over the past two decades, the stock market has tended to fare best when unemployment is at its lowest, except this time around where high unemployment and a higher market have gone hand in hand. This could suggest that if unemployment drops, the market could go significantly higher. One can hope!

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