Don't Worry
Don't Worry
By Frank Holmes, Chairman & CEO
U.S. Global Investors, Inc.
"When the pain of declining share prices is so great that it becomes the headline on the front covers of leading magazines, the market is approaching a bottom (based on historical cycles.) This is a classic Presidential Market Cycle. Now is the time to position your portfolio for the year 2000."
In the pasture of this world, I endlessly
push aside the tall grasses in search of the bull. Following unnamed rivers,
lost upon the interpenetrating paths of distant mountains, my strength failing
and vitality exhausted, I cannot find the bull. I only hear the locusts
chirring through the forest at night.
-- Kakuan
In
our own search for the bull, it is important to remember basic sound investment
principles, such as defining goals, the importance of long-term investing
and the role of stability and diversification. In this age of increasing
globalization, a well-rounded portfolio should include global investments.
At
U.S. Global Investors, we believe the bull likely will return next year.
Here's why: In April we told you the market was overdue for a substantial
correction. Our forecast was based on the Presidential Market Cycle Theory,
in which the economy fluctuates in fairly regular patterns over the course
of each presidential term. The first two years after a presidential election
tend to be weak, while years three (the pre-election year) and four (the
election year) offer strong returns for the stock market. In the past fifty
years, market movements from high to low to high again have run almost uniformly
in four-year patterns.
Let's
go back four years ago to 1994, when emerging markets worldwide were declining
as a result of the "Tequila Effect" spurred by Mexico's economic
crisis. At that time, in addition to the meltdown in Mexico, the markets
witnessed the near-destruction of hedge funds thanks to overweightings in
derivatives, the $20 billion-plus bankruptcy of Orange County, California,
and an inverted yield curve for U.S. Treasuries - not exactly a comforting
picture.
What
was the response? Almost immediately interest rates dropped, inflation was
reined in and several incentives were used to jump-start the U.S. economy.
Also, the G7 group of nations met to arrange financing packages for the
more desperate (but still economically viable) emerging markets.
Four
years later, what do we see? The Asian "flu" has become a meltdown,
threatening to take with it other developing economies; hedge funds are
being hammered again, this time by currency volatility; the yield curve
is again a disparately inverted one; and Russia is in the midst of its worst
economic crisis ever.
The
response to these woes is already apparent, and the parallels with actions
taken four years ago are unmistakable. Fed Chairman Alan Greenspan has dropped
interest rates, President Clinton and others are calling for lower taxes
and the G7 is scheduled to meet.
The
volatility in the markets today is not confined to the S&P 500 or the
Dow Jones Indices or even to one particular country. It is worldwide. Countries
such as Greece and Italy are doing relatively well, while others such as
Russia and Japan have done poorly. The United States, as well as the United
Kingdom, on a relative basis are strong performers. Investors should keep
in mind the difference between market volatility and a bear market.
A
host of factors has wreaked havoc on the market, demonstrating that the
laws of economics are applicable worldwide. Japan's banking sector still
has not reformed fast enough for international investors' comfort, creating
a ripple effect and further depressing the already-stagnant East Asian markets.
If reforms are inaugurated soon, Japan may recover. However, at this time
it remains a wait-and-see situation.
I
have just returned from visiting several of these countries, and it is readily
apparent that their economies will not return to health overnight. Prime
Minister Keizo Obuchi may very well lose his political influence, and possibly
his post, if he does not break with tradition and carve out a new economic
policy on the heels of the previous failed ones.
We
urge investors to consider the following carefully:
We
suggest you give extra weight to diversifying your portfolio in accordance
with your investment expectations and avoid overweighting in highly volatile
sectors. We also urge a cautious approach to emerging markets, with single-digit
weighting here, as well as in the natural resources sector. A good basis
for a well-diversified portfolio is usually no more than 5% in gold, between
5%-10% in emerging markets and likewise for global resources.
Volatile
markets make everyone nervous; and the importance of staying in the market
long term cannot be underestimated, especially in a market that has seen
record highs as well as record lows in the past 30 days. Investors should
be careful before assuming that it is either a bull or bear market, as markets
have a history of proving market-timers and speculators wrong. As any committed
investor knows, steady, long-term, stable growth is the only true measure
of performance.
Remember,
diversification plays an important part in investing, especially in a volatile
market; and U.S. Global Investors offers an array of investment vehicles
to help you create a well-rounded portfolio to assist you in your search
for the bull.
Editor's
Note: Frank E. Holmes is the Chairman
and CEO of U.S. Global Investors, Inc., a San Antonio-based investment advisor
offering 15 no-load mutual funds. For information call 1-800-US-FUNDS (1-800-873-8637)
or inquire via e-mail at shsvc@us-global.com .
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