More Market Reactions from the Herd

It appears that investors are now in the grip of panic, amidst a healthily growing global economy. The source of that panic is the Federal Reserve. In particular, the new chairman, Ben Bernanke, has investors paralytic with fear that each new datum of global and/or US economic growth will cause Bernanke to ratchet up US interest rates even more, choking off said growth.

Further, economists seem now to be in two camps regarding the pace of the Fed’s tightening over the last two years or so. Some feel the Fed is still “catching up” with inflation, and has to tighten even more to become “neutral.” Others, however, feel that the Fed has already over-tightened, and needs to abate its increases before killing the US and global growth now in effect.

This week’s market index performance consisted of two lightly traded, insignificant days prior to the Fed meeting. On Wednesday, although up in the morning, the market, ended the day down, on the Fed’s rate increase news. Our portfolio, however, enjoyed a nearly .5 percentage point gain. Over the next two days, however, investors apparently became gloomier and gloomier, prompting a market sell-off which resulted in the loss of 2.4 percentage points of return. Growth stocks, including those in our portfolio, primarily energy, whose prices also sank, on fears of global growth abating, fell even more in these last two days. Considering the market’s reaction, it’s surprising our large-cap growth portfolio ended Friday down less than 1% more than the index for the week.

Even non-energy issues such as Apple and Whole Foods declined. Network Appliances fell by slightly more than 10%. BJ Services, EOG and Sunoco all declined between 6% and 10% for the week.

Seriously, did anything tangible really occur last week to drive long term values of companies like these down 10% in a few days? Doubtful. Perceived "spot" values amidst confused interpretations of Fed moves, yes.

As I look at the monthly portfolio returns for this year, one thought occurs to me. Over the past nine months, the major global economic story has been the rise of many commodity prices, including forms of energy, in the face of rising, legitimate demand levels. Nobody’s turning oil spigots off, blockading copper or titanium shipments, or refusing to sell or ship other basic industrial commodities.

The past few months have seen investors apparently uncertain with respect to what the Fed will do in reaction to US housing prices and, then, overall global demand. However, absent Fed actions to permanently dent growth and throw us back into a recession, it’s only a matter of time before energy and other growth-oriented issues once again become higher valued. Overall, it seems to me that the index’s 3.4% return under-represents the true strength of economic prospects. So long as the market is in one of those “there will never be growth again that is not punished by the Fed,” neither our growth-oriented portfolio, nor the market, is likely to move up sharply.

However, when investors come to realize that strong, low-inflation global growth does, indeed, exist, the market will move up. Remember last year's spring "soft patch?" The illusionary economic pause turned out not to be reall, and by June, the market took off on a tear. Our portfolio zoomed ahead, as it typically does during periods of realized healthy economic growth. Having seen this situation time and again, I suspect it will recur this summer.

Right now, a lot of mediocre analysts are trying to interpret and guess the behavior of some really intelligent, skilled people, i.e., the Fed Governors. Thus, we'll likely see a lot more senseless volatility and navel-gazing, until the global growth data and lack of inflationary effects of energy and other commodity prices are obvious. Some things don't seem to change.