"Money, you have lots of friends hanging 'round the door. When it's gone and the spending ends, they don't come no more." -- Billie Holiday (1915-1959)
After reading an article in The Wall Street Journal (WSJ), I could not resist posting an addendum to my previous post on housing and the American consumer. The WSJ article of May 3, 2007, MasterCard Posts 70% Profit Gain As Consumer Card-Usage Increases, speaks directly to my comments regarding the American way of spending more than we make and the nearly endless and arguably dangerous capacity to do so. Notice that I said "nearly endless..."
MasterCard's 70% profit gain attests to a shift in spending vehicles -- not a shift in spending behavior. The WSJ article comments that "MasterCard's results have been bolstered by strong consumer spending, despite the housing slowdown and high gasoline prices in the U.S." I believe the article should have said that MasterCard's results have been bolstered because of the housing slowdown not despite a slowdown. Consumers are simply shifting from the mortgage equity money tap to credit cards. As housing and Mortgage Equity Withdrawal (MEW), what I call the "money tap," dries up, the American Consumer will not simply change their spending habits. Americans will vehemently perpetuate their lifestyle with every ounce of energy and spending vehicles available.
As much respect as I have for (most) economists and (some) financial media pundits, quantitative data does not make up the entire "big picture" of the economy and financial markets. Consumer spending is primarily a behavioral issue -- a qualitative concern -- not a quantitative one. As the mortgage equity money tap runs dry, Americans will predictably turn back to credit cards to finance their lifestyle. And why not? After all, salaries are on the rise, the stock market is doing well, and we re-financed all of our credit card debt with equity from our homes. Our credit cards have low or zero balances! On a personal note, I've noticed a resurgence of zero percent "teaser" rate offers for credit cards filling my mail box. Most of the offers are for one year -- just long enough to max out those credit limits right around the same time adjustable rate mortgage (ARM) teaser rates "reset" and push mortgage payments significantly higher!
In financial markets, most everything, arguably, begins and ends with the consumer, which partially explains the push forward for stocks. I'll agree that new records for the Dow are difficult to ignore but a long-term investor does not make investment decisions based on economic and market conditions today, tomorrow, or even this year. While I would not be surprised if the market pushes even higher, perhaps to the 14,000 mark on the Dow Jones, smart investors look to the next economic and market cycle as we slowly and methodically prepare for the end of the current cycle. A disconnect from reality and investor euphoria are classic signs of the beginning of the end. We just do not know the precise moment the unfolding begins...
Currently, I believe the "disconnect" exists between economic and market fundamentals and the most recent rise for stocks. The U.S. economy, as measured by Gross Domestic Product (GDP), slowed to 1.3 percent annualized growth in the first quarter of this year (any reading under 2.0 percent is below the Federal Reserve's "comfort zone.") Meanwhile, investors are consistently "shrugging off" bad news and fixating on good news to enthusiastically push stocks even higher.
Long-term investors (those with a logical reason to invest in stocks) should stay invested in this market but not completely invested. As I've consistently stated in this Blog, market timing is a loser's game while time in the market is prudent. With that said, smart investors can balance the short-term euphoria with a long-term perspective by slowly shifting assets from the more speculative areas (small-cap stock, emerging markets, "hot" sectors) to less speculative and defensive areas (large-cap stock, multi-sector bond, health care). At the same time, those things we know with certainty such as our investment objective and time horizon should dictate asset allocation -- not market movements.
Another post in my "Invest Like a Philosopher" series, which will more specifically address asset allocation, is forthcoming.
In the mean time, enjoy the view from the back seat because we're in for a long journey. Let "the fools" worry over the day-to-day "media noise..."
TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a fee-only, registered investment adviser based in Mount Pleasant, SC, near Charleston. ACI specializes in retirement, investments, and comprehensive financial planning.
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