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You Asked, We Answered...
Q: With all the doom and gloom about the economy and on Wall Street, is this a good time to buy stocks?
A: Pessimism certainly abounds at present. It has depressed stock prices and surely has slowed the pace of economic recovery. Nevertheless, the expansion is unfolding. Estimates of third quarter GDP (Gross Domestic Product) growth were increased sharply, based on data released in mid-September, even though there seemed to be more focus on the data that was weak. In my view, the expansion is likely to continue, although it may be necessary to resolve some of the dark clouds hanging over the market, such as Iraq, before the economy and the market are able to make strong headway.
Many estimates of third quarter GDP growth exceed 4 percent—far stronger
than the 1.1 percent reported for the second quarter. Demand is too
inconsistent to expect the strong pace of growth to be sustained. However,
on average, there is still respectable growth. So, while GDP growth may
oscillate, it should still average something in excess of 3 percent. That
would be sufficient to sustain a solid expansion, but insufficient to
reduce
unemployment much. In fact, 3 percent growth is very close to the
economy’s potential, so it can be sustained without re-igniting inflation
pressures.
With fears of war, false accounting, corporate malfeasance, management enrichment, dishonest stock analyst recommendations, and numerous other issues that create uncertainty and heighten concern, it will take some time to clean up the mess and to dispel these concerns. But, all is not “doom and gloom.” Corporate profits are rebounding, the economy is growing again, interest rates are exceptionally low, and the issues of the day are being addressed.
The brave—those of you who can take a longer-term perspective—should consider buying more stocks (and get out of bonds). CEO David Murdock recently announced that he wants to take his company, Dole Foods, private, because the stock price is too cheap. Many companies are buying back stock for the same reason. There is so much pessimism built into the market, pushing stocks down and Treasuries up, that investors should go the other way. Those companies doing well will not be ignored indefinitely. It isn’t easy psychologically, but selling Treasuries to buy stocks actually makes the most investment sense at this time. Even if this isn’t the absolute bottom, stocks are very cheap right now. _____________________________________
Dr. Charles Lieberman, an investment strategist, who oversees the "Portfolio Partners" investment program of Advisors Financial Center, LLC (AFC), provided the answer to this question. You may contact him by phone at 845-368-0938, or e-mail him at chuckl@portfoliopartners.com
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