Keeping your chin up in a modest economy

Things are a bit cloudy when trying to discern the future direction of the markets these days. As you well know, I believe that’s difficult to do with much accuracy, except at the extremes. For instance, after the October rout in 2008, I felt rather sure that the next big move would be up. I was patient, and that helped as it took five months for that to begin. But normally markets, the economy, housing, trades, jobs, and a host of other measures tend toward one direction or another. Fortunately the majority of times the direction is a good one.

These days, the measures seem to be spewing off in various directions, making predicting the future even more tedious. Not that it matters, as most would just assume that the current course would continue for the foreseeable future.

Likewise there is a sizeable minority that whenever any economic indicator or market is positive, they foretell doom. And, of course, when the inevitable corrections or bear markets occur they proudly declare that they predicted the downturn. That they predicted it four years early or predicted 10 of the last 3 doesn’t seem to dampen their enthusiasm.

These days both camps can say, “I told you so” at just about the same time. The U.S. economy, as well as most economies of the world, seems to be taking a breather.

You’ve heard, and I’ve reported, that the Federal Reserve is tampering its “quantitative easing”. All this means is that after years of throwing everything, including the monetary kitchen sink, at the economy, they are now throwing things at it at a lesser rate. The result: a rather modest recovery.

Responding to this modest, but improved situation, stock prices have gone up significantly since the financial crisis. So much so that there is a real danger of a decent sized correction. Bond yields are low because of the Fed’s stimulus. You may have noticed the consequences: the low interest your bank accounts earned last year. As tapering continues, bond prices will suffer. The only question is how quickly and how soon.

In other words, stocks look scary, bonds look scary, and cash doesn’t pay squat. Isn’t this fun?

To combat this, a lot of investment “weapons” are being used. Unconstrained bond funds, dividend stock funds, floating rate funds, option enhanced funds, and a whole lot more. The thing is, enough people are concerned, and enough money is flowing into these areas that they are getting a bit overextended. After all, when everyone jumps off a sinking ship into a lifeboat at the same time, you can end up with a sinking lifeboat.

“Well, thanks for making my day so uplifting,” you might say. “If you’re such a genius, what are you investing in?” I’ll tell you. I’m investing in most of the things I’ve mentioned in this article. Yes, a case can be made that each one of them has problems. But that’s the way of investments in general and economies as well.

Instead of taking my cue from the harbingers of financial doom, I get it from Annie: When I'm stuck with a day that's gray and lonely I just stick up my chin and grin and say....The sun'll come out tomorrow.

This article was published under the title "Dangers persist despite modest pace of economic recovery"

in the Wichita Falls Times Record News on June 1, 2014.