Commentary: Money Matters: Market will suffer in second half of 2012

By Robert Smith The Daily Record Newswire It should be apparent by now that the recent market decline is a sign that investors are beginning to lose confidence in an accelerating recovery in the second half of 2012. My view is that the stock market rally will stall or even reverse in the next six months. Hence, low-value stocks or those that don't pay dividends will suffer. Commodities will suffer. Energy stocks will suffer to the extent that they are tied to coal and natural gas. Despite recent weakness, gold and other precious metals should continue to be held in light of this. Income-producing securities should continue to do well in coming months despite predicted weakness in stocks. The reason for this is that once capital gains appear more elusive, the certainty of a 5 percent to 8 percent return from income securities becomes much more appealing, especially because the Fed's determination to keep interest rates artificially low is proving decisive. In short, I expect that the normal divergence between stock and fixed-income markets will re-emerge, and it will favor fixed income. Therefore, on an opportunistic basis, I recommend that investors increase the number of dividend-paying positions. Pundits who insist the market will move higher in the second half predicate this assumption on a few slim data points: a perceived bottoming of housing prices, a decline in the unemployment rate, a pickup in consumer spending and the continuing growth of corporate profits. I am inclined to look at other factors to define the economic outlook for the next six to 12 months. These include: concern that new government regulations are hampering capital investment, a deadlocked Congress, massive and ongoing deficit spending, basic disagreement about taxes, disagreement about how to further stimulate a tepid economy, a continuing economic crisis in Europe, potential disruption of oil supplies if Iran is attacked, and uncertainty about who will be president. Then add the expiration of the Bush tax cuts and the beginning of budget sequestration on Jan. 1, 2013. These two "cliff" events alone could spell a renewed recession, if the other looming negatives don't do so first. Those folks who are bullish on the economy and stocks argue that these problems will all be addressed in the lame duck session of Congress following the November elections. However, this is a thin reed indeed on which to cling. It is, in fact, questionable whether one should invest any confidence in people who have just been turned out of office and are seeking new jobs. Therefore, diversification into a portfolio of income-producing assets should give investors a fair return -- and perhaps one or two losers that can be sold to lower tax bills, which will likely rise in 2013 no matter who is president. Because investors can't live on corporate bond yields of 3.39 percent or savings account returns or CDs, they must go further afield in search of income. As mentioned before, the Fed is forcing income investors to go beyond traditional instruments in order to earn reasonable returns. In so doing, investors will face new sources of risk in real estate, equity markets, energy prices and commodity prices. This is unavoidable. However, diversification across asset classes will mitigate this. Take heed, for those investors who choose to give up income in order to "protect" principal will find in five years that they have given up both. ---------- Robert Smith is president of Peregrine Private Capital Corp. Contact him at 503-241-4949 or at www.peregrineprivatecapital.com. Published: Thu, Jun 7, 2012