Quo Vadis?

Quo Vadis is a Latin term meaning, "wither goest thou?".  I don't speak, read or write Latin and I don't make a habit of using it.  However, in this case, I'm applying it to the US economy and investment markets.

Given all of the recent turmoil in the Middle East (read that as concern about oil) and the earthquake/tsunami double tap that hit Japan, markets have been erratic at best and quite negative at worst.  There have been several bad days recently on world stock markets, including ours, but it might be helpful to put some of these recent loses into perspective.

Using the Morningstar US Market Index as representative of the entire US market, it was down 4.6% from its recent peak on February 18, and down 1.6% since the Japan earthquake and tsunami.  A total negative move of almost 5% is not insignificant--I know my portfolio certainly has taken the hit--but in a market where 1% daily movement, up or down, is the norm, it's not a lot.

In the long term, most market movement is rational, with investors making decisions based on the same known information.  In the short term, not so much.  Investors, even institutional investors, are people and people sometimes react irrationally.  In this case, I think (highly technical investment terminology) that many investors are overreacting.

The US economy runs a $60 billion annual trade deficit with Japan.  A lot of that is automobiles and auto parts, in spite of the fact that the Japanese auto makers are now manufacturing a fairly significant number of cars in the US.  The disruption in the Japanese auto industry, while having an extremely negative impact on the Japanese economy, may actually open a window of opportunity for US auto manufacturers to fill the void.  Further, reducing the US-Japan trade deficit is not a bad thing for the US economy.

I'm not saying that US investors should seek profit opportunity in Japan's disaster.  Far from it.  I've previously commented on the tragedy and how deeply concerned I am for the people of Japan.

What I am saying is don't overreact to short-term irrationality in markets.  Market corrections happen.  They also make comebacks.

So, where is the market going, right now?  It will have up and down days and it's likely that more of them will be down than up.  The problem is that I can't tell you on what day that will change and we'll begin to see more up days than down.

It is not improbable that I'll make some changes to improve quality or reposition my allocation tactically. When the turn comes, I want to be invested and not sitting on the sidelines.