I don't remember what day it was, but it was back in early March, when the whole world seemed scared to death.
I was reading some article predicting the imminent collapse of General Electric (NYSE:GE) -- which at that moment was trading under $7 -- when it suddenly dawned on me: These people are terrified!
And something else, Warren Buffett's famous maxim: Be fearful when others are greedy and greedy when others are fearful.
I said to myself, "If this isn't the bottom, it's close enough. If I buy here, I probably won't regret it in five years."
I did buy, and that turned out to be a good move. But I'm starting to get that feeling again -- only this time, in reverse.
Isn't it time to be fearful?
I don't understand why this rally keeps going. Actually, that's not quite right. What I don't understand is why anyone thinks there's any sound fundamental reason for the global stock market rally to keep going. I'm not cashing out yet (and I probably won't), but I think about it every day.
It's true that the acute moments of terror -- both in the markets and in the economy -- have passed, and if nothing else, the markets were sure to rebound somewhat from where they were in early March. But up 40%?
Think about what's really going on out there:
- The U.S. unemployment rate is up to 9.4%, the highest level in 26 years. And while the rate of increase may be slowing, it's still going up.
- All sorts of manufacturing-sector indicators, like rail freight volumes and demand for "distillates" (a catch-all term for things like diesel fuel, heating oil, jet fuel, and the industrial chemicals produced when oil is refined -- basically, the stuff that isn't gasoline), are still declining.
- There's good reason to believe that the housing bust has a long way to go.
- Retail sales are still sluggish, and consumer lending is way down -- folks just aren't spending money.
I could go on and on. But you get the gist -- the rate of decline may have slowed in some areas, but it's still declining. But shifting from an economic meltdown to a mere nasty recession doesn't constitute a recovery.
Sooner or later, the markets are bound to figure this out.
Long story short, I think it's likely that this rally will fizzle, and we'll revisit the March lows -- maybe not next week or even next month, but before next year.
What to do
I think moving back toward a more defensive investment posture is a good plan right now. I don't mean selling all of your stocks -- if we do keep rallying, you don't want to be completely out of the market -- but if you've moved into more aggressive names in recent months, you might want to think about downshifting a bit.
Specifically, take a look at dividend-paying companies. Buying a company with a decent dividend yield -- and the ability to keep paying that yield through the downturn -- gives you some level of return you can count on, no matter where the market gyrations take us.
The companies you should look at aren't the highfliers -- but most of those don't pay dividends anyway. Think mundane, think everyday, and think sustainable. Think businesses that make ordinary stuff that even laid-off folks are likely to keep buying. And then take a look at Colgate-Palmolive (NYSE:CL), Kimberly-Clark (NYSE:KMB), or Heinz (NYSE:HNZ). Some of the most boring names in the supermarket turn out to have rock-solid balance sheets and great dividends.
Likewise, think about who keeps the lights on and the house warm -- things people will pay for no matter what. Utilities like Consolidated Edison (NYSE:ED) and Southern Company (NYSE:SO) will never be 10-bagger stocks, but if you reinvest those dividends, you'll still build wealth over time. Oil companies might well see some appreciation if prices keep rising, and with a stock like BP (NYSE:BP), you get good management and a very nice dividend.
In other words, think big, think solid, and think of businesses that are either sustainable through a prolonged downturn, or are likely to benefit from our current conditions.
And think hard about buying some solid dividend yields. Because if the market tanks again, a 5% or 6% return could look mighty good.
