In our October column, Contrarian Investing, we laid out a compelling reason why investors should ignore the dreadful headlines of the day and put some cash to work in dividend paying common stocks.
Four months later (2-22-2012), the S&P 500 index has increased more than 17 percent, and the Russell 1000 Value Index is up more than 18 percent. Unemployment dropped in February, which is one of our important barometers of economic recovery that we discussed in detail in our November 2011 column. Markets and the economy are experiencing a thaw from the prolonged economic winter that has besieged our portfolios for several years.
This economic thaw is similar to the mild winter weather in East Tennessee this year. Unseasonably warm temperatures can tempt us to dismiss the reality that spring isn’t quite here yet. Before you mothball your flannel and tweed for the season, remember Dogwood Winter.
That’s the name for a very predictable pattern of late-season cold weather that hits after the flora of East Tennessee has budded to life. It happens just about every year, and we know what causes it; so, no one should be surprised when it hits.
Like the low temperatures during Dogwood Winter, investors shouldn’t be surprised by a similar price pattern in their portfolios, especially after the large uptick in the past 5 months.
Corrections are the markets’ way of accommodating the risk and time tolerances of investors, traders and speculators. Traders take a very short-term view of markets and are quicker to hit the sell button after an up move. Some investors have a lower risk tolerance and may want to rebalance their portfolios away from the assets that have increased the most (count LeConte in this category). Others may need to sell, so they can pay Uncle Sam in April.
It shouldn’t surprise anyone if the market were to pull back 5 to 10 percent or trade sideways for a few months as investors debate and digest whether the economic recovery will continue or if our national debt problem becomes as onerous as Europe’s debt problem.
Hopefully, we’ll only face Dogwood Winter and not the Blizzard of 1993.