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After a period of relative calm, volatility has now returned to the stock market. The most pressing issue is the fate of Greece, which will default on its sovereign debt in the absence of an uncertain bailout from other European Union members. The Greece situation has major consequences for financial markets and could easily trigger another credit crisis of similar magnitude to that which we just experienced. Regardless of the outcome, there is no clean and simple resolution to this problem. Four other European nations will soon find themselves in similar positions. Looking even further down the road, there are legitimate fears of the two largest economies in the world facing funding, currency and debt crises of their own. There is also the issue of China, the nominal bright spot within the global economy, which appears increasingly frothy in terms of commercial real estate and infrastructure overcapacity.
 
Even in the absence of the aforementioned ugliness, we still face the same intractable problems within the domestic economy – serious unemployment, extreme consumer weakness and a housing market that still has years of inventory overhang. Thus the recovery remains slow and mostly jobless and we find ourselves in an extremely tricky period to be an investor. On the one hand the macroeconomic big picture is truly frightening and the market rally has outpaced the fundamentals. On the other hand, there are powerful reasons to remain invested in equities that cannot be disregarded.
 
The first reason is the lack of alternatives. Extraordinarily low interest rates make cash an unappealing investment (while longer-term fixed income securities are extremely vulnerable to declines in value). Second, the looming issue of inflation as the dollar continues to be debased moves cash from unappealing to unacceptable in the context of long-term investing. Finally, while the broad market is not necessarily attractive, there are still plenty of stocks of great companies trading at quite reasonable levels. For all of these reasons it is rational to be fully invested, but this stance should be balanced by remaining conservative within one’s equity portfolio. Stocks of large, multinational companies with dominant market positions, strong earnings and the ability to finance their growth themselves would be preferential.  
 
The heightened level of uncertainty suggests that market volatility might continue to be pronounced. This presents opportunity, however, as long as one can maintain a more even keel and invest with a level-headed approach.
 
Michael H. Berlin, CFA, CPA, is the founder and portfolio manager of MHB Equity Partners, a value-oriented private investment partnership. He previously worked at Lehman Brothers, and before that at Ernst & Young. Mr. Berlin holds an MBA from Columbia and a BBA from Michigan.
 
Michael can be contacted at mberlin@mhbpartners.com and/or at (631) 629-4928.