There is a great deal of focus today on politics and our economy, and many investors have recently turned negative.
Based on this feeling of pessimism, I believe that today's political drama and accompanying economic backdrop warrant some discussion.
As I write, the major stock market indexes have dropped about 15 percent in under 45 days. This is not a huge drop by historical standards, but the largest one we have experienced in nearly three years.
Initially, I think it is important to separate political issues from economic issues.
For example, the recent vote on lifting the debt ceiling was discussed daily in the media. I received several calls from clients who were actually concerned about a U.S. government default. There was even a countdown on the 24-hour news channels indicating the number of days, hours and minutes until default!
This was a political issue and not an investment issue. It was a simple problem that could be solved with a simple vote. And that's exactly what happened. This was certainly not a reason to panic; however, there are many investors who did.
You may recall a couple of months prior, there was also an ongoing debate of a pending government shutdown. Again, a timer was once more displayed on your TV by our entrusted friends in the media. Again, in spite of the wave of concern that spread through the investment world, this issue was remedied with a vote. Both of the aforementioned issues were political issues.
As an experienced financial advisor, I have yet to find a single, short-term political issue that would cause me to alter my investment strategy or philosophy. Anything that can be solved with a simple vote doesn't typically cause a responsible investor to change paths.
There was also a recent downgrade of U.S. debt by S&P, a major rating agency. It is important to note that the two other major rating agencies still consider United States debt AAA. This is still the highest achievable rating. There is no doubt that this S&P "downgrade" will serve to get the attention of our elected officials. Whether justified or not, it is still a negative that the markets must address in the short term.
Now, let's talk about the economy. Problems in the economy can rarely be solved in the short term with political decisions. Economic problems generally have to work their way through the financial system. Sometimes this can take months, or even years. I believe that is exactly what's happening now.
The economy has yet to fully recover. Specifically, the job market and the housing market are the components lagging behind. This has remained the case since the 2008 financial crisis.
There have also been some recent signs of slowing growth in manufacturing. The depth and severity of the 2008 financial crisis wounded our economy like we hadn't seen since the great depression. Simply put, the deeper the wound, the longer the healing process.
In my opinion, we are certainly healthier than a few years prior however, the wound is not yet completely healed.
On the positive side, corporate profits have historically been the biggest drivers behind the stock market. U.S. corporations are presently growing both revenues and profits.
In fact, 2011 could end up being the most profitable year in history for U.S. corporations. And 2012 may even be better. It also appears that housing has finally reached bottom. It appears the residential rental market has already improved markedly.
That certainly doesn't mean housing will bounce back to previous levels within the next few years. It signifies there are some indicators showing us that the worst may potentially be over.
Additionally, record low interest rates should also make housing more affordable and business investment a greater possibility for many.
Call me an optimist. But, we live in a country that has endured many hardships in its 235-year history. And, in comparison, our present circumstance pales when compared to many of the difficulties we have already overcome.
Historically, our markets have always recovered from every single decline. Our country, our politicians and our people eventually get things right. Granted, we are still in a recovery phase. It hasn't been perfect, but as is usually the case, the patient investor who is able to make prudent decisions will be likely the one who is most rewarded.
Marc P. Tomberg is branch manager at Raymond James Financial Services. His office is located in Ryanwood Square at 2140 58th Ave., Vero Beach. He may be reached by phone at (772) 778-4399.