Signs Point to Further Growth

Emotional markets are often irrational markets. In both real estate investing and in the financial markets, investors without a discipline can be easily swayed by fear and greed. By developing a discipline and anchoring decisions to specific facts, investors can maintain their bearings amidst uncertainty and turbulence. Many facts, today, point to continued growth in the U.S. economy.

However, in 2011 the level of angst and vitriol in the markets and the political arena caused markets and fundamentals to disconnect. While the economy moves up at a modest but consistent pace, the stock and bond markets seem to be priced for drama and despair. In spite of impressive growth in corporate profits, last year, the U.S. stock market went nowhere. While European leaders assemble trillions of dollars in rescue funds, the markets contemplate the impact of a colossal meltdown of the global financial system. These worries seem overblown.

The May-Investments Leading Economic Indicator keeps climbing, forecasting continued growth into 2012. Of the ten indicators that comprise the May-Investments LEI, all but the export sensitive Baltic dry freight index are positive, or strongly positive. The collapse of the freight index indicates a slowdown in global shipping activity, probably as a result of a recession in Europe and possibly Asia. The rest of the indicators focus more on domestic economic activity and suggest continued growth in the U.S. economy. If the markets begin reflecting a return to economic “normalcy” and we can get out of this “bond bubble,” or “fear bubble,” or whatever you want to call it, the stock market could do very well in 2012 and interest rates could shoot higher.

Locally, there are additional reasons to be optimistic. Dale Beede, Managing Director of Coldwell Banker’s Grand Junction commercial properties division, notes that the local real estate market looks like it can improve. “We’re starting to see more investor traffic which is creating new opportunities for sellers.”

Commercial real estate prices have adjusted down, but to reasonable levels, not to fire sale price levels. Taking advantage of the lower prices while interest rates are very low creates opportunities for potential real estate investors. The stock market is also inexpensively valued, especially compared to alternatives such as bonds, TIPS, and bank certificates of deposit. We would not argue that “savings” should be invested in more volatile “investment money” alternatives. However, it is getting harder to argue that “investment money” should be on the sidelines invested in savings accounts.

In 1979, Woody Allen wrote that, “mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.” Allen was wrong, in 1979. And we think that the financial markets, priced as if they are caught between a rock and hard place, are wrong today.
 
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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