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With the Dow over 10,000 for the first time in recent memory, are you feeling optimistic?
A superficial glance at the news might suggest that the economy is on an upswing. But looking at home foreclosure numbers and the unemployment rate suggests otherwise. What’s your take on the state of the economy now that Q3 has closed?
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3 Answers
We are heading into a sustained realignment of the economy. There are many parts of the economy that are operating as normal or better than normal (leaving aside anything to do with Wall Street and the markets.) But the problems associated with overextending credit that gave the markets so much trouble is being compounded with small businesses who have no chance of subsidized assistance. In this economy the nimble will prevail, the smart strategy will thrive.
The problems of our economy often seem insurmountable until compared with what is going on elsewhere. I would not trade places with most of our friends in other countries.
When the Dow Jones was at 6500, I think about the low, most stocks were clearly undervalued. At 14000, or what ever the high was, most stocks were clearly overvalued. It's just that we did not know it at the time. It is one of the most difficult parts of investing; that is to see beyond what is going on at the moment to ascertain the underlying trend.
At the current prices, the market may be more fairly valued against the prospects of recovery in the next year or two. For those that think this recession was really hard on corporations, I think the opposite is true. Except for those banks and institutions bailed out, and the car companies who truly have suffered, most corporations have weathered this by becoming more lean. This should enable companies to handle increased business profitably.
I worry more about the overall macro state of our economy, the wars, the value of our currency and the trade and government budget deficits. I also worry about state and local infrastructure and welfare programs, hard hit by the drop in tax revenues. The recovery of our total economy and government agencies and programs may be quite slow.
So I expect a slowing but continued rise in the equities markets. This would not be a time to bail out.
I think you need to seperate the financial markets from the real economy. When the real economy picks up then you can be optimistic.
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