The markets may be going sideways for now, but Steve Forbes sees reasons for optimism—and numerous opportunities for investors willing to break from the crowd. Here are the highlights from his far-ranging speech on the economy and the markets.
A long way from euphoria
Sir John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” We’re a long way from euphoria, and even optimism. Barring a major foreign crisis, the market still has plenty of upside left in it.
The economic outlook
Barring a major foreign crisis, the U.S. economy, despite a lousy first quarter, is going to do better the rest of the year. We’re sort of like a baseball player who bats .150 and this year may get it up to .250, when he should be batting .350. Better, but not what it should be. One reason for the improvement is that bank lending is starting to go up again. Commercial/industrial loans have been growing at a double-digit pace for the first time in a long time.
While it may sound counterintuitive, one reason we have had such subpar economic growth is that quantitative easing held back the economy, in my view. The Federal Reserve tried to suppress not just short-term interest rates but also long-term rates. In essence, the Fed went in the game of credit allocation and made it very easy for the government to borrow, very easy to buy mortgage-backed securities, and very easy for large companies to borrow. But small and new businesses have had a more difficult time getting access to credit. So, I think the taper actually means the Fed is making credit less restrictive for small and medium-sized businesses—the more the Fed tapers, the more money is going to be available for the rest of the economy.
The outlook abroad
Overseas, it’s very, very mixed. The U.S. is the global engine right now. In Europe, the United Kingdom is doing better—lot of investment opportunities there. Germany looks OK but seems to be going backwards on some of the economic reforms that it made a decade ago. The rest of Europe has been showing more signs of life. But the fact of the matter is Europe is still in terrible condition, better than it was a year ago, but not anything that’s going to bring the world along.
Japan, even though they have a prime minister who wants to get that economy moving again, just raised their national sales tax from 5% to 8% and they’re raising capital gains taxes and payroll taxes. Not much good economic news there.
In China, the economy may be slowing, but its leadership wants to make serious reforms to create real financial markets in that country. So China may be troubled now, but if the reforms start to really kick in, watch out. China’s growth is going to resume.
Emerging markets have struggled in the last year and a half. The thing to keep in mind about troubled countries like Brazil, Indonesia, Turkey, maybe even the Philippines is this: The markets already know they have problems. So put your emotions aside. It’s precisely when it’s gone down 50%, 60% you should start to give a serious look at it. Anything is, at some price, a bargain, even though it’s not a prime asset.
The coming opportunity in health care
Part of the problem with health care is that there is a disconnect between providers and consumers. But more and more now, we’re starting to get more patient-oriented health care system.
You’re starting to see little signs of it already. For example, flu shots and walk-in clinics in drug stores.
Don't go with the crowd
You have to put your emotions aside and look at it cold. You can’t time these things, but there are huge opportunities out there, in terms of major breakthroughs in health care, medicine, technology—it’s a huge opportunity. Emerging markets are a mess right now. But wait for those 60% corrections, that’s when you move in. You can see it in biotech today—panic. That’s the time to move in, in my view. You don’t go with the crowd. You go against the crowd.
Editor’s note: The comments above are edited excerpts from a presentation Steve Forbes delivered in Chicago on May 2, 2014.