This is not an easy question to answer because my view is based on a short-term and long-term time horizon. First of all, I remain optimistic in the short-term when looking at stocks and the overall market.
Artificial Rally
The move by the Fed and other Central Banks around the globe on Wednesday to flood the system with liquidity was the catalyst for the big rally. The money that has been injected into the system could be enough to create an artificial rally that lasts for several months and well into 2012.
Think back to QE2 when the Fed flooded the market with money as it bought up Treasuries in November 2010. The market rallied about 14% in the six months following the announcement. A similar rally would propel the major stock indices to multi-year highs.
Based on Wednesday’s action and the high probability of more action in the coming weeks from agencies around the globe, the “artificial rally” will likely continue. The reason refer to this rally as artificial has to do with the reason behind the rally. It is not based on the fact Europe finally figured out a way to fix its debt issues. The rally is based on this flood of liquidity that is only a short-term fix to a long-term problem.
I like to use the analogy of someone with a major flesh wound on his or her leg. To cure the issue the patient must receive serious medical attention. Instead, the doctor puts on a large Band-Aid and stops the bleeding for the time being. Eventually the Band-Aid will have to be removed and stiches will be required. But until the doctor is ready to put in stitches the Band-Aid will keep the patient alive and kicking.
The leaders of the EU are the doctors that continue to apply Band-Aids to the debt issue in the region, which is the flesh wound. Eventually the EU will have to realize things must change dramatically and fast or it will run out of Band-Aids and they may lose the patient. Losing the patient would be equivalent to the EU breaking up and the Euro no longer a currency.
I know this is very pessimistic from me, considering I typically take a cautiously optimistic view on the economy, world, and life in general. The reason for the change is because I do not believe the leaders of the world realize they are playing Russian Roulette with the world economy. But they are!!
Your Portfolio
Back to the original question about what to do now with you hard-earned money.
I will continue to ride the “artificial rally” that the Central Banks are creating and be long stocks. I would not suggest 100% of your money in stocks, but I would also not want to be 100% in cash either.
The exact mix of stocks, cash, gold, bonds, etc. will have to be determined by your risk tolerance, time horizon, and goals for the money in the portfolio. I cannot even throw out a number because I would not be doing you justice. If you want a Free Portfolio Review from Penn Financial Group, we will be offering just that during the month of December.
Matt McCall
President, Penn Financial Group
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