For investors, as if low home values, high unemployment, and mounting debt weren't enough, in the last several months both the United States and the world have witnessed significant economic, political, financial, and even weather-related events.
A World Much Maligned
In March, Japan experienced a devastating earthquake and tsunami that resulted in worldwide supply disruptions. At about the same time, oil prices stepped up, and there was increased turmoil in the Middle East.
By early summer, Greece came within hours of defaulting until two bailout packages were bestowed. Due to extended debt problems in the euro zone, these same lending conditions were also extended to Portugal and Ireland. Worries continue that the debt contagion will spread to Italy, Spain, and even France, which is currently co-shouldering most of the costs with private investors and Germany.
Positive Signs
More recently, we've seen signs that things are looking up. Japan is on the mend, and oil prices have declined substantially. While there are no distinct indicators of significant growth, there is nothing visible that is expected to impede modest growth for the rest of 2011.
As for the stock market, there are good reasons to invest in equities. Corporate balance sheets are strong, bolstered by a significant amount of cash, and the recent volatility that accompanied the S&P rating downgrade offered up an entry point into quality investments at affordable prices.
Growth in emerging markets remains strong, accounting for more than one-third of world gross domestic product, and the asset class is expected to grow over 6% in 2011 (Source: Federal Reserve Bank of San Francisco, FRBSF Economic Letter, January 2011). This is good news for large-cap companies with exposure to the emerging market consumer.
Banks are well capitalized and oil prices have decreased, giving American consumers greater access to more spending capital. Furthermore, Americans have been vigilant in reducing their own personal debt over the last three years. All of these factors should lead to increased confidence and spending. With increased spending comes increased profits, which in turn, should reward shareholders.
Despite the recent negative events, it's important to remember that it's not where you start the investment process that matters, but where you end it.