How to invest during uncertain times

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Stick to fundamentals

ABBY JOSEPH COHEN

Goldman Sachs senior U.S. strategist

"There is incredible investor uncertainty," said Cohen, who sees slow growth for the economy.

The recent 40 percent rally in the Standard & Poor's 500 was justified, she said, because the original sell-off was too extreme -- driven by the need by large investors to sell strong stocks to raise cash.

That's past. Now, fundamentals will be more important for stock selection -- with investors focusing on valuations and earnings growth.

She expects the market will move up like a staircase. And the end of the year looks promising because of how investors look at profits: They compare one quarter to another.

And the end of this year should look good compared to the disastrous fourth quarter of 2008.

In keeping with her view of slow growth and the need for productivity, she believes technology will be a relatively strong sector.

Her major concern is exports. America's largest export partner is Europe, yet its ability to consume remains impaired by serious economic weaknesses.

The positive: With demand weak, production has been down. Businesses have drawn down their inventories. Eventually, producers may need to increase output to make up for scant supply, and economic growth could pick up.

Still, businesses will not invest in real estate, and consumers will save as businesses rebuild their inventory.

For the third quarter, she expects 1 percent growth in gross domestic product, and another 1 percent in the fourth quarter. Next year: 1.5 percent growth.

Prepare for deflation

DAVID DARST

Chief investment strategist of Morgan Stanley global wealth management

"You need to protect yourself, shorter term, from deflation. But that might not last more than one to 1 1/2 years," Darst said. "You need to protect yourself a little from inflation longer term."

That means everyone should have some Treasury inflation-protected securities, or TIPS, which adjust to pay investors more in periods of inflation. And given the likelihood of global inflation, some protected securities would be advisable. He warns: "Investors shouldn't be fooling with currencies, because they are too complicated."

A compromise would be Australian or Canadian exchange-traded funds.

With the lack of clarity in most forecasts, investors need to decide whether they are more concerned about inflation or deflation. Then, Darst said, they would tweak their diversified portfolio to hedge against the risk they envision. For example, investors might typically have 4 percent of their portfolio in gold and commodities, but if they were worried about inflation they might lift that to 6 percent. Likewise, for growth, add a few percent to small caps, techs and emerging markets.

Beware inflation

MARC FABER

Publisher, the Gloom, Boom & Doom Report

After the surge in stocks and a sharp rise in commodity prices, Faber said, "The entry point is not ideal." At the same time, he said, "It is unattractive to invest in bonds."

He thinks a downturn of perhaps 20 percent in stocks is possible, but he sees little risk of the market returning to its March lows because the Federal Reserve will take extraordinary steps to prop up the system.

The Fed printing money is a concern over the long term, and underscores his warning about bonds: "Government is exploding. I'm not sure deficits will decline." If the Fed were to let rates go up to reduce the deficit, that would slow GDP. Because the economy remains weak, he doesn't think the government will do what's necessary to address the deficit.

"The economic recovery is unlikely to be powerful" over the next few years. "In the long run, the dollar will weaken." Yet, because of the trillions of dollars in the global system, foreign currencies "are not desirable either." He has been buying physical gold and silver for 15 years, though the price is not as attractive as it was. Given his view of inflation, he said hard assets are the most attractive asset class, but not in the form of futures, which often are the heart of exchange-traded funds.

Over the long haul, he sees tremendous development in Asia and believes in buying commodities, companies that produce commodities and Asian stocks. But he is less interested now that prices have jumped.

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gmarksjarvis@tribune.com

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