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The Wisdom of Peter Lynch
By: Dr. Charles Lieberman, Chief Investment Officer
Date: 6/14/2010
Peter Lynch once said how he was forced to stop reading the papers over the weekend, since the doom and gloom depressed and worried him so much he was unable to make any investments on Monday. I understand how he felt. Apparently, Greece will default and the euro is at risk of falling apart, the housing market is about to weaken once again, and our economic recovery is petering out. As a result, our stock market may retest its March 2009 low. Fortunately, none of these popular views holds up to scrutiny.
Greece might default, if it cant get the public to accept large budget cuts or tax hikes. But, the same could be said about California or New York. If California or New York were to default, neither would be forced to exit the United States of America nor to give up using dollars as their currency. Similarly, if Greece defaults down the road, it can remain in the euro zone and continue using euros. A collapse of the euro remains highly unlikely.
Domestically, the housing market is improving. Unsold new home inventories are back to 1968 levels, despite a population that is roughly 50% larger. Existing home inventory is also down. Defaults appear to have peaked. Foreclosures add little net supply to the market since they force home owners to become renters, not homeless. So, the commonly predicted looming, but unmeasureable shadow inventory is not the unmanageable risk it is alleged to be. In the meantime, new construction has begun to improve, as homebuilders find a significant uptick in demand and inventories have been worked off. This improvement will become more substantial once job growth resumes in earnest.
Our recovery may be weak relative to prior recoveries following deep recessions, but it is still gathering momentum. Consumer spending is growing, the decline in retail sales notwithstanding. Industrial production is on a strong upward path. Investment is strong. Even job growth has resumed, although not yet to the degree desired by policymakers or observers. Since the Fed is unlikely to hike rates in the near future, the economy should continue to gather momentum.
Lastly, stocks are outright cheap. In March 2009, the financial system appeared at risk of imploding and the market was priced accordingly. Now, corporations are sitting on $1 trillion in cash, even as profits are rising strongly. So, M&A activity has picked up, as companies seek to gain competitive advantages through strategic acquisitions. Stocks are also trading at less than 12 times 2011 earnings, well below where they ought to be with low inflation and interest rates. We have nothing to fear . The markets correction is likely to run its course soon enough.
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