Friday, January 31, 2014

A correction or the next bear market?

Are the emerging markets currency woes a legitimate threat to developed market stocks (as in bear market)? Or are they a convenient excuse for a long overdue correction (anything less than a 20% decline)? Of course only time can answer, although lots of "experts"---shooting in all directions---will give it a shot.

While I may have the sense that---given the near-term economic potential (per recent indicators) of developed markets, healthy corporate balance sheets, the not-bubbly valuations for stocks worldwide, the lack of the euphoria that often precedes bear markets, the positive sloping yield curve (signaling no recession in sight), my, and others, assessment of the emerging market currency "crises" that have occurred during my tenure (they were ultimately wonderful buying opportunities) and the long-term growth prospects for emerging economies (where 85% of the world's population lives)---we're not yet on the verge of the next great bear market, the fact of the matter is not I nor anyone else can know for certain.

You've heard a thousand times that corrections are normal, essential even, phenomena. The thing is, they don't happen simply because they're a normal, essential part of the process. They happen because something occurs in the world that---for a brief while---frightens folks out of the stock market. If that something turns out to be a short-term blip in an otherwise upward sloping global economy, history will chalk up a market decline of 10-20% (should we get there) as a healthy, garden variety correction. If, however, it morphs into a global recession, we will indeed experience our next bear market (a 20+% decline in the major stock indices).

The few givens (I didn't get to the long-term technicals) I presented in paragraph two are all legitimate reasons to believe that the bull is not yet ready to concede to the bear. But of course things can, and often do, change in a hurry. The wise investor understands that the market is forever a precarious place in the short-run and, therefore, thinks in long-run terms. Long-run success comes from having the patience to weather the inevitable storms (big and small).

Comfort/patience amid the turmoil means possessing a confidence that comes from maintaining an asset mix that is consistent with your circumstances, rebalancing the major asset classes (equity and fixed income) and making sector (tech, staples, financials, etc.), style (large cap value, small cap growth, etc.) and location (U.S., Europe, emerging mkts, etc.) adjustments---at the margin---periodically. In essence, allowing the market to correct what needs correcting without reacting, accepting periodic declines in your portfolio's value, and adjusting intelligently along the way.

All that said---simply for our edification---I will be offering up deeper insights into the issues du jour as 2014 unfolds.

Here's a link to Franklin Templeton's Mark Mobius's (he's been the emerging markets guru for as long as I can remember) latest commentary on the present state of emerging markets...

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