For many U.S. investors, the new year doesn’t appear all that new. Home prices in the U.S. remain anemic, job growth feels inadequate and the market is about as turbulent as ever. But there’s a flip side to every coin and there’s often potential opportunity hidden in what looks like just plain old trouble.
Ed Perks, senior VP and director of Core/Hybrid Portfolio Management for the Franklin Equity Group and regular contributor to these pages, ruminates on what he sees as a continuing theme of disconnection between perception and reality and how it will shape the investment landscape in the year ahead:
Remember when you were a kid, and your parents warned you not to blindly jump off a cliff just because everyone else was doing it? The grown-up version of that home-spun adage might also include a warning to not blindly dump assets just because every other investor seems to be. But many risk-averse investors seem to be doing just that. Some recent trading days have seen nearly all stocks – even those of healthy companies — being sold. This is unusual, says Portfolio Manager, Ed Perks:
“Things like all 500 stocks in the S&P 500 declining on the same day — this is not something we have seen much historically — and that actually happened over the last month. The correlation amongst stocks is rising to near all-time record levels.”
It’s hard to imagine a scenario in which every stock in the S&P 500 is legitimately worth selling. Professional money managers understand that sentiment can often drive markets – and when that sentiment turns negative, investors may not give even healthy assets a fair shake. But this can create opportunities for those willing to take a deep breath and look closer before selling assets. As Perks notes:
“We are very focused on applying our fundamental research – equity and credit research – to identify opportunities, because when you have these mass, correlated movements, there is likely some opportunity to find value within.”
Market sentiment is such a powerful force that it may even create self-fulfilling prophecies. The European sovereign debt crisis, Perks argues, may even be exacerbated by a vicious cycle involving negative sentiment, as fears of sovereign defaults reverberate into the banking sector. The banking sector then becomes another source of potential trouble and contagion in the unfolding crisis: Read more…