As the first year of the Reagan presidency draws to a close amid mounting dissension and controversy, markets here and, indeed, all over the world have sunk into one of the most pessimistic moods in memory. Uncertainty has given way to despair as the promise of Reaganomics has, seemingly, gone aglimmering with the onset of recession.
The stock market drifts lower, while commodities continue to languish. Real estate, precious metals, diamonds—almost everywhere you look, investments are in a slump. And, as usual, the US shock waves have reverberated abroad, afflicting even the dynamic Asian stock and property markets.
The best investment continues to be high-yielding US-dollar money market instruments: Treasury bills, commercial paper, certificates of deposit, and money market funds. But now, even that haven is threatened, as the Federal Reserve's tight money policy at last begins to bear the fruit of lowered interest rates.
But therein may lie the clue to investment strategy for 1982. First a word of explanation, for some might not agree with the foregoing assessment. Tight money leading to lower interest rates? True, up until recently the hallmark of Fed Chairman Paul Volcker's tight money policy has been high interest rates. But those interest rates were as much an expression of inflationary expectations as of Fed tightness. Not that the Fed hasn't been relatively tight. It has kept well within its targets for moderate monetary growth.
The result has been a significant diminution in inflationary expectations. While the consumer price index was actually higher in the third quarter than in the previous ones, the wholesale price indices presage lower retail prices for 1982. So interest rates are coming off, and the bond market is showing a corresponding rally.
A bond rally traditionally presages a stock market rally. Whether that happens in 1982 depends on the depth of the recession, and that in turn depends on how the economy at last reacts to the first installment of the Reagan tax cuts. (With all the announcements of the failure of Reaganomics, you'd never know that the tax cuts, such as they are, don't begin to take effect until 1982.)
Whenever there is such a loud chorus of moans and groans it is good to take stock of the situation. It is doubtful whether the recession will be as severe as most seem to think. And if it's not, it may indeed be a very good time to "take stock."
The market is replete with bargains in many sectors. Generally speaking, smaller, well-capitalized, technology-oriented companies whose shares are underpriced relative to underlying net asset value should have the greatest potential. Such companies are most likely to profit from the liberalized depreciation rules by investing in productive new plant and equipment.
Since the next year, at least, will be one of great uncertainty—due to doubts about the inflationary impact of projected budget deficits—the US stock market is not the only place to be.
For one thing, give stronger consideration to selected foreign securities. Asia-Pacific stock markets, which have suffered bigger setbacks than the US market in the past six months, should be due for a major recovery later in 1982. When the time comes, the markets of Hong Kong, Singapore, and Japan have a record of exciting performance.
The barrier, again, is US recession, however. Those trade-oriented economies suffer from slackened US and Western European demand for their exports. Even so, awakening Western interest in those markets make them a good place to put a fraction of your portfolio.
Falling interest rates, mixed with continued long-term inflation fears, could finally pull precious metals and other commodities out of their doldrums. After two years of digesting the January 1980 binge, gold and silver should be ready to test new ground by mid-1982.
Other commodities could follow. Lumber, for instance, should benefit from renewed housing demand as interest rates fall. Long positions in future contracts with distant delivery months for such things as copper in anticipation of the eventual recovery in industrial and consumer demand also make sense. An alternative to commodity futures are resource-based stocks, including those of Australia. There can be little further downside price risk in this area.
A final area of interest is foreign currencies. As stated in this space last year, the US dollar is overvalued. That judgment has already proven correct with respect to the Swiss franc, which appreciated some 20 percent in a three-month period through early November. The dollar, at this writing, is still overvalued relative to the German mark, Japanese yen, and others, in view of our deteriorating balance of payments. Time deposits of securities denominated in these currencies are a good hedge against the US dollar and good speculations as well.
Steven Beckner is a free-lance financial writer, the assistant editor of World Money Analyst, and the author of The Hard Money Book.