Goldilocks on the tight rope

GoldilocksThis week’s economic news reminds me of the story of Goldilocks. The fictional character’s story has her entering the home of three bears and eating up the bowl of porridge that was neither too hot nor too cold.

Investors are in a similar position. They like the fact that our economy is weak enough to keep the Fed from tightening monetary policy and to avoid triggering inflation but strong enough to show modest corporate revenue growth and job creation.

Sounds reasonable, but now imagine Goldy balancing her porridge bowl as she walks across a circus tent on a tight rope.  The rope is wobbling and she could fall at any moment.

That may be the most apt analogy for where markets are now. The rally in stocks is due primarily to the easing of monetary policy all over the world. It is only tangentially connected to real economic growth.  Investors look at any signs of real economic strength with a telescope, so even very small signs are given huge importance.

That’s all good for some short-term gains.  The problem is no one knows how long this delicate balance will last. The whole thing is incredibly delicate.  It could come tumbling down at a moment’s notice.

Caution and diversification are the keys to navigating this market.  If you have gains, take some off the table.   If your portfolio is too heavily weighted in U.S. stocks, diversify internationally and into other asset classes.

Most Wall Streeters readily admitted the current rally is “liquidity based.”  That means it is based on loose monetary policy, not on solid economic growth.  In other words, it’s similar to the liquidity-fueled housing boom of 2005 to 2007, when easy credit drove up home prices. No one wanted to walk away from that party either, and you know how that turned out.

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