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Ignore the Noise. Equities Offer Income Potential

February 27, 2013

I share this because, while investors are warming to the opportunities in equities, the crowd noise from observers and the media pundits suggests that they believe the game is nearly over, and the journey will come to an abrupt end. Wow – the ‘haters’ are out in force!
-Joe Kringdon, Pioneer

Oh boy, are we a mercurial bunch!

Back in the summer I went on record that, amid the malaise, I was bullish on the market. As it turns out, equity market indices, by and large, printed positive returns for 2012. The S&P 500 Index was up 16% or so for the year. As of January 31, we have continued the positive upward momentum.

I don’t write these lines to gloat or to tap out a victory dance. As someone once told me, they don’t hand out trophies at half-time. Or perhaps more to the point, it’s harmful to exit a moving vehicle before coming to a complete stop. I share this because, while investors are warming to the opportunities in equities, the crowd noise from observers and the media pundits suggests that they believe the game is nearly over, and the journey will come to an abrupt end. Wow – the ‘haters’ are out in force!

Misdirected Paranoia
Common prospectus disclosure reads, “past performance is no guarantee of future results.” Yet, this crowd of naysayers seems to be projecting the paranoia associated with the “lost decade(s)” onto the current environment and beyond. They are preparing for the future by fighting the last few wars all over again. Their sentiments and actions (or inactions) are emblematic of an American looking the wrong way for traffic on a London street. Given wrongfully configured context, these people are looking in the wrong direction for the wrong things.

I continue to be positive on the equity markets. Trillions in cash – of both institutional buyers and individual investors – still sits on the sidelines. We are coming off an extended bull market in Bonds, where U.S. Treasuries are yielding between nearly 0% and 3%. Most fixed income investors understand the dangers of owning fixed rates at a time when yields may be poised to rise. The risk/reward tradeoff is not very favorable in such an environment.

I believe people confuse their need to generate income and grow it over time with the perceived security of something labeled ‘fixed income’. All of this cash on the sidelines won’t benefit from an investment that offers fixed income; but it may benefit from investments with the potential to generate income now, tomorrow and for some time in the future.

 

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