The Parable of the Lifeboat

US stocks lost 8.0% in the month of May, and dropped 1.5% on the year.  European markets are down 0.2-8.4% YTD, and Asian and South American markets are down 1.4-11.2% on the year.  No one seems to remember that world stocks gained 70-100% over the previous 13 months.  The number one question on our clients' minds is "Are we gonna lose 45% like last year?"  The answer is emphatically, "No!"  In the era of the high frequency trader and the exchange traded fund, it seems so quaint to remind our clients that 573,000 jobs were gained in the first 4 months of 2010.  The May jobs report disappointed in that, after excluding 411,000 census jobs, only 20,000 jobs were added for the month. However, initial jobless claims are falling, continuing claims are falling, average hours are up, average wages are up, and temporary hiring is up.  Employment remains a trailing indicator on the state of the US economy.  GDP growth is in the 3.0% range, inflation and interest rates remain near generational lows.  Earnings reports were spectacular, rebounding far better than expected from the 2009 recession.  
 
We tell our clients that it is reasonable to expect the stock market, net of dividends, to grow 8-10% year, with our current forecast at the low end of that range.  The volatility is murder!  The S&P 500 swings 1-3%/day, 5-10%/month.  How can our clients have the courage to commit to their stock allocations?
 
The cruise ship sank.  The passengers climbed into a lifeboat.  Dry land lies over the horizon 500 miles away.  If the passengers sit in their seats, pull on the oars and bail when necessary, they'll all reach safety.  Unfortunately, some of the passengers panic easily when storms blow up.  Other passengers have decided to steal food and water.  The passengers rush first to one side, then the other, violently rocking the boat.  With each roll, some passengers fall out, while other decide to jump out, reasoning they can swim to shore faster than the boat will carry them.  The ship's officer in charge of the life boat just sits in the bow doing nothing.  Eventually the lifeboat swamps and all drown.

Read the entire commentary here.