Remember the window-rattling passion, the crazy highs. But I have to be honest. The thrill just isn't there anymore.
I'm referring to the financial markets, of course. Over the past few months, resurgent stock prices and an amazing performance by bonds have made us all feel like teenagers. At this point, though, smart investors have to worry about what comes next in our up-and-down financial romance.
When the U.S. President tells bankers that he's itching for a fight, when the world's most populous nation begins to gear down on growth, and when a prestigious magazine publishes a cover story proclaiming that all assets are overvalued, it's time for even the most starry-eyed investors to reconsider their relationship to their portfolios. No one is suggesting it's time to dump everything. But it is time to look at the risks that you may be unknowingly embracing.
For starters, there are the growing political uncertainties. Stocks shuddered after Barack Obama--the Obaminator as Wall Street calls him--unveiled a plan on Thursday to put limits on U.S. banks.
The president's proposal is still a work in progress, but its main features are clear. Obama wants to impose a ceiling on how big any one bank can grow. Also, he wants to bar banks from trading with their own money.
The goal of his plan is not to prevent financial crises-history shows that accidents happen under any set of rules-but to make it easier to clean up the mess after a crash.
Obama wants to avoid a repeat of the last couple of years, when U.S. taxpayers were forced to bail out multimillionaire bankers because the bankers' institutions were too big to be allowed to fail.
That seems sensible enough. And Obama's vision of a less top heavy financial system may wind up being less jarring than the lurid rhetoric around it suggests. Barney Frank, the Democratic congressman who heads the House Financial Services Committee, says any new rules will be phased in over three to five years. It's still not clear whether the new rules will actually break up banks or simply prevent them from growing any larger.
For investors, though, what matters are not the exact details of the plan, but the sense of growing tension at the very centre of the global financial order. When Obama told bankers on Thursday that he's happy to take them on if they want a fight, his anger was stark. As they say in marriage counseling sessions, this was not an affirming moment.
Neither were recent developments on the international scene. China announced this week that it was trying to rein in its massive program of fiscal stimulus because of inflation concerns. If China does throttle back on growth, the outlook could darken for commodity producers, which have prospered from China's enormous demand for raw materials.
Financial markets might shrug off Obama's threats and China's warnings if it weren't for concerns that this economic recovery is proceeding a lot more slowly than experts had forecast.
Brad DeLong, a professor of economics at Berkeley, notes that most economists' forecasts from 14 months ago had predicted that U.S. unemployment would be around 7.5% by now and falling rapidly. Instead, the jobless rate is at 10% and going sideways.
Canadian unemployment has also remained stubbornly high. With 8.5% of us unemployed, we look good only in comparison to our American neighbors.
The question that's emerging is how much longer financial markets can keep on climbing when the real economy goes nowhere. Like a couple that have grown apart, Bay Street and Main Street seem to be living separate lives.
The Economist magazine recently published a cover story that made the remarkable assertion that all major asset classes are now overvalued. The magazine argued that stock and bond prices have hit lofty levels only because of low, low interest rates. The problem, of course, is that interest rates will inevitably go up if this recovery picks up speed. And that will drive down stocks and bonds.
All of which suggests that now is an excellent time to sit down with your portfolio and ask if you really want this relationship to continue.
For starters, consider how much risk you want to take. The past year has provided you with a heaven-sent opportunity to see how you react to bad times. If you couldn't sleep during the market bottoms of nine months ago, maybe you should consider permanently erasing some of the risk in your portfolio.
One simple way to dump risk is to reduce debt. Simply making extra payments on your mortgage will likely give you an after-tax return of 5% or more---which is far higher than any investment-grade bond is offering at the moment.
If you're debt free, don't sneer at holding cash. While GIC and savings accounts rates are paltry at the moment, neither of these options will lose money-and that's more than you can say for bonds or stocks.
If you are determined to invest, consider edging into any investment gradually rather than all at once. Making regular monthly contributions-dollar-cost averaging, as it's called-means that the market's ups and downs get leveled out.
When choosing stocks, tilt toward size and stability. Jeremy Grantham, the head of GMO, a Boston money manager, has called this crisis as well as anyone. He sees today's best values in what he call's high quality stocks-big, globe-spanning companies with low debt and reliable profits.
These companies-such as Microsoft Corp., Johnson & Johnson and Wal-mart Stores Inc.-are not exactly svelte ingénues. But they are the type of reliable companion you can settle down with for whatever lies ahead.
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