A few people asked me to offer some investment advice following yesterday's stock market rally that was predicated on a deal being outlined in Europe. I had suggested that this was more likely a 'suckers rally', because Europe is only marginally better off and austerity measures remain in place throughout Europe and the United States.
So my two cents (which includes brief discussions to direct questions I received):
1. U.S. Treasuries remain the safest investment. While yields are low, another rally in Treasuries may give you more of a capital gain event than a dividend play. If folks get nervous again and start buying bonds, yields will fall. But if you own bonds, the net result could be that you'd make more money selling them then waiting to maturity.
2. U.S. Dollar - on the one hand, the dollars fall against Chinese currency is exactly what people keep asking for; a rise in the Yuan means a fall in the Dollar. On the other hand, when markets get nervous, people buy Gold and/or the Dollar. I admit, I'm not a gold bug, but many people have profited from buying gold. Also, I have no reason to believe that going 'short' the Euro is going to be a bad trade - if they print a $trillion Euro to solve their debt crisis, the Euro must fall as a result.
3. Gold - some people buy Gold because they believe that it's the best to own when their is uncertainty in the currency markets. In other words, these people buy out of fear. Another group of folks buy Gold as a predictor of world-wide inflation. These folks believe that as world GDP goes up, so too should the price of gold. These two groups cannot both be right at the same time. Fear and growth are pretty much mutually exclusive. I do not subscribe to the fear notion nor the inflation notion as a reason to buy gold. However, I do own semi-precious metals as a proxy for world growth.
4. Stocks - if you follow the theory that you must always be invested in stocks, I'd still be playing it safe with 'blue chip' companies that pay at least a little dividend. Too many Wall Street prognosticators keep shouting that valuations are too low (meaning stock prices should be higher). This would be true if you believe that the U.S. and/or Europe will figure out a way to improve economic conditions beyond the current slog. I believe that the austerity measures in Europe and the impending U.S. budget cuts will again drag down the world markets. More over, in America, state and local governments have little else to cut without another round of layoffs. So while the private sector is hiring a little, the public sector will continue to shed jobs.
5. Social Security & Medicare - if I were in my prime earning years (I am) and was being told that my Social Security and Medicare benefits might be cut, then I should be saving more. The effect of the Congressional Super Committee and the constant discussion about lowering my future payments has me saving more. The obvious result - I am consuming less. This too remains a drag on the ability of our economy to regain strength.
6. Current Senior Citizens - maybe these folks will be receiving a small increase in benefits next year, but can it make up for people who have savings accounts earning next to nothing. How many of these people have recaptured their losses from the stock market volatility? I think that spending habits of seniors have also been impacted to the downside.
In conclusion, I am sorry for not offering specific investment advice. But I hope that folks understand that when the 'herd' is telling you it's OK to buy stocks again, it's probably the time to sell. The contrary is true as well, when things look most dire, it's probably a good time to buy. I am of the opinion that we will come close to another recession before things get better. Housing took us into this mess and housing will need to improve before things get better. Keep you eyes on housing as a sign of when it's really OK to think that markets are improving.