Why The Doom-and-Gloom Crowd Is Dead Wrong

The Sky Is Falling… Again

In reaction to the latest episode of the wildly popular Eurozone drama, “Politicians Behaving Badly,” both the mainstream media and the blogosphere are buzzing with excitement. And who can blame them? Buzz and excitement are good for ratings, and good ratings mean more clicks and higher advertising revenue. But in terms of providing useful information for investors, it’s no better than watching the latest episode of “Doomsday Preppers.”

Fear Sells

The event that has pundits and pontificators firing up the doom-and-gloom machine is the attempted bank deposit money-grab by the Cyprus government. I’ve got to give them credit for style points – it’s bold, creative, and kind of kooky. Will they actually follow through on their threat of confiscating 10% of all the money on deposit in Cypriot banks? It’s possible, but not likely. And even if it happens, it probably won’t cause a massive bank run that will result in financial Armageddon for the Eurozone.

Don’t Be A Doomer

Here are a few of the reasons why I’m optimistic about the prospects for the global markets.

1. What’s happening in Cyprus is a legitimate concern, and one that bears watching, but overall the European banking system is stabilizing and the global economy is recovering, led by the U.S.
2. Key leading indicators for the U.S. economy point to moderate growth of 2.5% to 3% this year, and 3% to 3.5% next year.
3. This pace of economic growth is enough to sustain corporate earnings growth of 7% – 10% this year and next.
4. With steady but slow economic growth, the Fed is likely to continue its accommodative stance until the unemployment rate reaches 6.5% or so.
5. In China, fears of a “hard landing” last year have subsided. Growth is returning, inflation is moderate, and credit growth is accelerating.
6. The U.S. housing market continues to improve, creating new construction activity and rebounding home prices. The number of households who are underwater on their mortgage is falling, which allows them to refinance at better rates. This increases the amount of money available to purchase goods and services, for which there is still plenty of pent-up demand.
7. There has been a surge in merger and acquisition activity in the U.S. lately. This helps stock prices by raising the price of target companies as well as other companies in the same industries. It also improves market valuations by shrinking the supply of equity available to investors.
8. Corporations are on a share buyback binge. February saw a record $118 billion of new buybacks announced. This boosts earnings per share for the market, which further supports higher stock prices.
So the question for investors is whether to focus on the fundamentals of the global economy, which are clearly moving in a positive direction, or on the drama in Europe. I’m advising my clients to stay fully invested in equities and other risk assets, to the extent that their investment plan allows.

If the situation in Cyprus worsens, and if the contagion spreads to the rest of the Eurozone, and if a widespread run on banks starts to happen, then I will get more defensive. But that’s a lot of “ifs” and I don’t believe in setting an investment policy based on the media’s idea of a worst case scenario.

What say you?  Leave your comments below.