It seems I’m not the only contrarian.
According to this Los Angeles Times news article, UCLA economists are standing firm on their prediction of no U.S. economic recession. Doesn’t mean that it doesn’t “feel” like one. One look at our investment statements or at the breathtaking drop in the financial markets and we all know how it “feels”. But essentially, this is a crisis of confidence. We’re seeing panic selling now, which I believe is a good and healthy thing.
Panic selling, which is a factor in depressing stock prices, means the future holds higher *expected* returns. That is the terrible mathematic truth. For those that have 10-20 years of market investing, this drop in prices is (as Martha would say), a “good thing”. It just doesn’t feel like it.
What’s also happening is our perception of market risk is changing. This is also a good and healthy thing. When perceptions of market risk are high, so are returns. Of course, the inverse is also true. Investing in stocks is risky and should not be undertaken lightly no matter what pretty color filled brochure you’ve been given. People who bought in to the market near market highs in 2001 and around August of last year had, generally speaking, a very low perception of market risk. Of course, market risk was there all the time, it’s just that our *perception* of it was not very high.
So, does this mean it’s all a bed roses from here? Absolutely not. Business cycles and societal trends don’t work like that. But as risk premiums rise, so do returns. So, if your investment policy statement is mandating that you sell some of that cash and fixed income you’re holding to buy equities and you’ve been resisting, reconsider your market risk tolerance.
Remember, it’s not very often that you get to buy equities while they’re on sale. 