To paraphrase Yogi Berra, the market feels like déjà vu all over again. We are reprising the fear and anxiety of mid-2011, when the issue of Greek sovereign debt first scared the markets.
A year later, Greece has re-emerged with its recent election questioning prior agreements and commitments to its austerity package and the eurozone. Spain has also moved into the headlines as another weak link in the European Union. And because Spain's economy is much larger than Greece's, it could be a much bigger problem. Add concerns over recent data confirming a slowdown in China's economy and a weak employment report in the U.S., and the strong first-quarter 2012 market returns have vanished.
There is no shortage of fear and concern. But strong businesses are not in a materially different position from where they were at the end of March. The hit that companies have taken in market values in the recent selloff is way overdone, relative to current business conditions. Longer term, I don't expect any lasting impact.
As a forward-looking mechanism, the stock market frequently engages in a series of "what ifs." What if Greece leaves the eurozone? Will others? Can European banks survive? And what if Europe's recession continues or deepens? What is the impact on American exporters? China's exporters?
The problem with the "what ifs" in a stressful environment is two-fold: the scope of the speculative questioning expands and common sense or even empirical restraints give way to fear of the worst-case scenario. Any "what if" becomes a possibility.
The other problem is that the world is viewed statically: No responses to the "what ifs" appear to be viable. The "what if" possibility continues to unfold in a downward linear fashion, or an unabated negative spiral. In either case, the outcome is truly problematic.
History suggests otherwise. Contrary to the fears that this "what if' mindset produces is the comforting reality of the rebuilding of the U.S. banking system from the depths of the post-Lehman Brothers financial crisis, when many had looked for a total collapse and nationalization of the banking system. The municipal bond market did not experience a collapse in 2011 after much apocalyptic "what if" speculation by market pundits.
The real world result of "what ifs" running amok is that stocks get way oversold. For investors, the challenge becomes how to navigate during such a stressful period. There is always the temptation to end the short-term pain by selling.
However, if one owns a quality company, then there is likely to be an adaptation to the circumstances raised by "what if." That is how the company became successful in the first place: by demonstrating its ability to maneuver and to manage adversity.
As we saw in the fourth quarter of last year and the first quarter of 2012, once the macro-driven "what ifs" subsided, the result was a sharp and rapid recovery for many quality companies that had been unduly punished.
I strongly believe that much the same will play out as global fiscal and political actors start to get a better control of the situations that beset them right now. As we have seen repeatedly, serious problems demand serious attention and concerted solutions. The "what ifs" are never without responses that can ameliorate a potentially frightening outcome.
While this is once again a nail-biting and frustrating environment, I suggest investors to stay with their investments in strong companies where business has been good and valuations seem way too low.
There will be a rebound, probably much sooner than anyone in the midst of the crisis can envision. Don't let yourself be whipsawed. Stay focused and patient.
Some oversold stocks that represent great opportunity are Eaton Corp. (ETN), Teva Pharmaceutical (TEVA) and Charles Schwab (SCHW). For those looking for a port in the storm, consider higher-yielding, more stable stocks such as General Electric (GE), H.J. Heinz (HNZ) and Time Warner Cable (TWC).