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2 Excuses to Stay Out

By Bob Landaas

The two biggest reasons I hear why investors are still waiting to get into the stock market have nothing to do with stock prices. Here they are:

  1. I want to wait until clarity after the election.
  2. The deficit is too high in the United States. It’s going to ruin the country.

Let’s take these one at a time. No matter who gets into the White House at the end of the year, it’s positive for the markets because the markets hate uncertainty. What the markets want is clarity.

I’m positive that someone’s going to win. Generally, the majority wins. The majority of us will be going into next year feeling good about our prospects.

There’s really no correlation between the markets and the elections. There used to be. The markets tended to peak during the presidential races and then hit a low point at mid-term elections. That pattern changed in the early 1990s and has yet to repeat itself.

Equally nonsensical is the deficit. There are some people in this country convinced it’s going to bury us quickly. I’ve said this time and time again: Your canary in the coal mine is the yield on the 10-year Treasury. When that yield jumps, start to sweat.

Lately, though, the yield has been just below 2%. The historic average is closer to 6%. So when the yield on the 10-year Treasury starts to jump, that tells you that the big money around the world is no longer interested in buying our debt. That’s not the case. Money continues to pour into Treasuries. The Chinese even have upped their purchases of Treasuries over the last couple of months.

So I find it interesting that the two biggest reasons I hear for not participating in the stock market – clarity with the elections and improvement on the deficit – have very little to do, in my opinion, with where stock prices are going to go over the next couple of years. But that shows you the emotional state of many investors. As we all know, reason doesn’t have anything to do with your emotions.

It’s not that I’m dismissive of those concerns. I think that the deficit matters long-term, but short-term it doesn’t impact stock prices. Nor will the election. In spite of how emotional and how divided everyone is, there hasn’t been much of a connection between who runs the White House and how stock prices are doing over the near term.

As many of you know, interest rates and corporate earnings are what drive the stock market over the long term. Since I started in investments in 1975, corporate profits and the Dow Jones Industrial Average have expanded by almost exactly the same rate.

Bob Landaas is president of Landaas & Company.

initially posted April 26, 2012

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