Quote of the Week

...is from legendary investor Howard Marks’ book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor:

“In investing, as in life, there are very few sure things. Values can evaporate, estimates can be wrong, circumstances can change and “sure things” can fail. However, there are two concepts we can hold to with confidence:

• Rule number one: most things will prove to be cyclical.

• Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.”

This week stock markets continued their persistent rise with the S&P 500 crossing 1400 and the Nasdaq topping 3000. Since bottoming in October, stock markets across the globe are up 30-40 percent. Most market participants now seem confident that Europe has turned the corner, China has avoided a hard landing and the US housing market has finally bottomed. With fear subsiding (the VIX dropped under 15), analysts and investors are becoming increasingly confident that the current bull market is here to stay.

Lurking beneath the largely positive economic headlines, actual global economic growth has been slowing. First quarter US growth is once again trending below 2 percent and the full-year outlook is not much different. Europe has entered a recession, with several periphery countries either in or approaching depressions. Spain, not Italy, is struggling mightily and will truly test the resolve of European politicians in the months ahead. China recently lowered their growth target for the next 5 years to 7.5 percent, but current data suggests actual growth is even lower.

Aside from lower growth, corporate earnings estimates for the current quarter and year have been adjusted lower over the past few months. Profit margins also appear to have peaked as input prices continue to rise and productivity growth slows. Lastly, oil prices continue to rise with gas at the pump in many metropolitan areas already over $4 per gallon.

None of this data implies that the stock market is going to stop rising or roll over anytime soon. However, Marks’ cautions us to remember that periods of consistently positive headlines and investor sentiment are fleeting. Soon a time may come when most others have forgotten this rule. Be mindful of protecting your capital in advance of that moment.