Growth investors continue to be disappointed by the headlines coming out of Europe and the U.S. Many I have spoken with are frustrated by seeing the value of their portfolios drop seemingly week after week. These investors would like to know why this market is falling and who can help solve the issues bringing the markets down.
As I have mentioned in previous articles, the main culprits are certain European countries and their banking institutions. Last week, when the word got out that one of the major banks in Europe borrowed heavily from the European Central Bank, all chaos broke out. The market, which has the mentality of shoot first and ask questions later, ended up selling off many major European bank stocks the day this news broke since it wasn’t announced which bank was borrowing.
The problems in global markets are very easy to explain, in my opinion. The European Union as a whole makes up makes up about US$16 trillion in GDP, making it the world's largest economic region. The U.S. ranks second with about US$14.7 trillion in GDP. Both have large debt issues which seem to be hampering growth -- the U.S. is growing but not at a fast enough pace to compensate for European debt fears acting as a drag on the global economy. Thus we are seeing a global slowdown and stock markets are trying to price that into their models going forward.
However, before investors get too negative on the stock market, the one thing to keep in mind is that there are a few wild cards out there that can help get things back on track. These wild cards are government and central banks. It was the U.S. Federal Reserve that helped kick start a market rally when they introduced more easing measures in the second half of last year. Could this come again in 2011? Many believe it will. The European Central bank, along with the governments of France and Germany, may also come to the rescue with new measures to stimulate the Euro region. I am not sure if this will happen in the coming days, but many believe it will.
With so much negativity among investors backed up by mostly negative economic, how can investors protect their portfolios? At this time, I still maintain that investors should not fully remove themselves from the market. We know from history that the best days, weeks and months in the market come right after the worst ones. Thus, I believe you need to stay in this market in some capacity to share in the rebound when it happens. In the meantime, however, it makes sense to be defensive so I would recommend owning stocks that pay dividends. If you are considering making any buys right now, make sure you are buying something that pays you to wait. In my opinion, if it doesn’t have a dividend payment right now, I would not consider it. Pure growth investments should be considered after this market has rebounded somewhat. For those that can stomach the wild ride and are looking for pure growth bargains with dividends, stick to ideas you can understand like the agricultural sector or specific technology that you know has a future. The ride on these more growth oriented names will be bumpier, but you will be able to at least understand why the investments are behaving as they are.
If you have any questions regarding the above article or are looking for an investment advisor to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you.
Allan Small is a Senior Investment Advisor with DWM Securities Inc., a DundeeWealth Inc. Company. This is not an official publication of DWM Securities Inc. The views expressed are those of the author alone and are not necessarily those of DWM Securities Inc.