One of the investing world’s pre-eminent contrarians, David Dreman, writes in Forbes that the U.S. is indeed in a depression — not a recession — but says it’s also a good time to put money to work in the stock market.
“Let’s not sugarcoat what’s going on,” Dreman writes. “We are in a depression, not a recession. It continues to devastate industry after industry like a wild forest fire leaping across the clearings.” Dreman says unemployment will top 10% in the U.S., and says it is impossible to predict when things will turn around because so much depends on how the government’s stimulus efforts work.
Still, while he thinks it is a full-blown depression, Dreman says the current situation is much different than the Great Depression — in some good ways.
“Virtually every industrial nation is introducing monetary and fiscal stimulus packages,” he says. “We also have a more stable political system than we had in the 1930s, when fears of anarchy, socialism and communism were well founded.”
Dreman says to “throw away” any analysis that focuses on the short-term. He adds, “If you have owned defensive stocks or Treasurys you have fared better than most, but when the market comes back, these investments will be laggards.” He recommends “a diversified portfolio of large-cap value stocks”, which he says will perform well over time, “particularly with prices at their lowest levels in decades and the likelihood of the highest rates of inflation since World War II. … Even if stocks drop another 15% to 20%, they are likely to at least double from their current levels over the next five years. Trying to catch the market bottom is a loser’s game.”
Real estate will offer “enormous opportunities over the next five years,” Dreman says, as government programs will kick in, and inflation will drive prices upward.
Dreman recommends three exchange-traded funds that focus on down-and-out industries that have good upside potential: the S&P Oil & Gas Exploration & Production ETF (XOP); the Financial Select Sector SPDR Fund (XLF); and the SPDR KBW Bank ETF (KBE).