Many friends, colleagues, and clients have been asking me about the increased volatility in the markets and possible Fed tampering. Instead of getting caught up in the excitement, I called my favorite money manager, George, for his thoughts.
“Look at cash flow!” he boomed into my speakerphone. “Last earnings season saw S&P revenues increase 1% and bottomed line profits increased by 5%: certainly a positive surprise.” From his perspective, corporations continue to pursue process productivity, which means they will drive increased revenues to the bottom line. This is why, despite the naysayers who believe it can’t continue, we have been experiencing record-high profit margins for the last few years.
As for government tampering, George believes, “Good markets don’t stop because the Fed tightens; they stop when the Fed tightens too much.” As of now, the Fed mentioned that they may begin taking measures later this year, which has raised market volatility, but I believe improvements in housing and re-shoring of jobs will help stabilize economy if and when the Fed steps in.
In truth, the greatest impact on the economy’s long-term success lies with us as individuals. Take George and three of his friends who recently celebrated their daughters’ wedding engagements with a round of golf and a trip to the ballpark to see a Pirates game. They figured they might as well enjoy themselves before the catering bills started pouring in.
Without warning, the storms of the Midwest began heading in their direction (Pittsburgh, PA), and the news media was touting the possibility of a meteorological occurrence called “un derecho.” The scientific translation means a wide band of storms that contain wind in excess of 58 mph; however (in Spanish), the word also means “a right,”—as in “an entitlement.” Well, after years of diaper changing, dance recitals, and proms, this feisty foursome felt that they also had a right—a right to enjoy a day of leisure. To increase their odds of making the correct decision, the tech-savvy quartet pulled up every real-time weather radar and tracking model available to predict the storm’s path.
And what did this hardy group do? They decided tempt fate, pack up the rain gear, and hit the links and the park. The Results? They had a good time playing bad golf, consumed a few adult beverages, and saw a nifty game in which the Pirates left victorious.
Their behavior is a reflection of our current economic climate: businesses will continue to monitor the elements (government spending, potential supply disruptions, global events…), execute their plans, and operate with success. If unforeseen events arise, business will not stop, but evaluate, adapt, and move forward. These are the strategies that have helped profits increase and created an improved employment picture that should sustain long-term economic growth.
With this in mind, George likes equities. He intends to take advantage of the current level of volatility to stock up on cyclicals including industrials (XLI) and Tech (QTEC) which thinks has considerable upside potential for the remainder of 2013.
Have a productive week.
This Update was written by Chris Leone and Ron Mastrogiovanni.
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