What's really troubling the market?

As explained in the previous post, at Taylor Frigon Capital Management we do not advise families to build their investment foundations on an attempt to predict this cycle or that cycle. All the loudspeakers of the giant financial retail firms and the financial news media are constantly blaring a message that you have to time cycles -- cycles of the dollar, cycles of the Fed, cycles of quarterly economic acceleration or deceleration.

However, the shorter the cycle you are chasing, the less you build your foundation on the real source of wealth in this country for the past one hundred years. That foundation should be "ownership of successful business enterprises which continued to grow and prosper over a long period of years."

If you are focused on that goal, then you will want to examine a company's leadership and its business fundamentals very carefully -- because you may own that business (if all goes well) for "a long period of years." You are less apt to care about the management team if you are only going to hold the company for a few weeks because you chase short-term cycles.

It is better to focus on a longer period than the loudspeakers of the financial world tell you to focus on, and to watch different indicators that are more important to creating the kind of healthy long-term environment in which a company can thrive. Instead, pay attention to indicators of economic freedom: the level of taxes and regulation placed on the economy, for example.

Right now, the short-focus commentators are atwitter with diagnoses of the recent market turbulence that suggest the market is shaky because of the continuing mortgage and credit problem, and that the "weakened consumer" is going to bring the economy into a recession.

This diagnosis is short-sighted. The economy has accelerated strongly during 2007, with the third quarter GDP number blowing past analyst estimates, and the most recent productivity growth number the highest since 2003 (and also blowing past analyst estimates). The credit problems have been priced into the market since the end of the summer and are largely "past history" to the forward-looking market.

More likely, the market is upset right now because it is looking forward into 2008 and seeing the possibility of an election that will bring higher taxes and greater regulation in years ahead. This possibility may well be weighing on the market in spite of generally strong economic growth numbers and earnings reports.

Markets like the one we are in now happen from time to time, and it is times like this that make it so important to be a long-term investor with a longer-term perspective than the one the financial world dictates that you should have.

We wrote more about the importance of having the right time perspective in a commentary entitled "What Hasty Investors Could Learn from an Ent."

You can read this and other Taylor Frigon investment commentaries in the commentary section of our web site.