Markets and Fundamentals

The jobs report printed yesterday and it stunk in every direction. There is a lot to digest right now in terms of whether there is an honest recovery or not, all aspects of QE are being second guessed and dissected, the housing market has legitimately double dipped, at the very least there is reason to be skeptical that the banks are really getting healthier all of which contributes support to the idea I’ve been talking about which is that the worst financial crisis in 80 years will not wrap up all neat and tidy in just a couple of years.

If we were talking about a different country in the context of top down portfolio construction then the issues above along with the debt and Social Security/Medicare issues and it would not take long to conclude it should either be avoided or underweighted.

In my opinion the general top down investment case for US equities has been weak for a long time but of course this has not prevented the market from doubling in two years. Perhaps the decline into March 2009 was an overshoot or perhaps the snapback is the overshoot but it should be obvious that markets and fundamentals diverge and converge all the time. A market or a stock can go up a lot in the face of lousy fundamentals and of course they can go down a lot in the face of great fundamentals.

Internet stocks with essentially no fundamentals went up a lot in 1998 and 1999. In my opinion the fundamentals at Banco de Chile (BCH), the Chilean bank we don’t own, did not warrant a 55% decline in the price from March 2008 to October 2008 but that is what happened anyway.

I would think that as a general rule of thumb you would not want too much exposure to holdings whose fundamentals stink. Assessing that the fundamentals for something stink is easier than picking individual stocks to buy. The process of figuring out what to avoid combined with picking ETF that minimize exposure to lousy fundies gives a decent chance of successfully navigating the stock market cycle. On top of that still needs to be some sort of defensive strategy because as noted above good fundamentals will not prevent something from going down in price when everything else is going down.

The bigger point here is the notion that I among others have been writing about for years but which has gotten more attention lately which is minimizing declines in the course of a full stock market cycle. Completely avoiding large declines is not realistic but minimizing them is possible.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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