Eye on the Market I September 18. 2012 J.P.Morgan Topics: On staying invested over time; Market update; and the magic elixir of the Clinton Recovery The "By Any Means" necessary mantra of the world's central banks remains in place, boosting global equity markets again last week, now up 16% for the year. This theme has trumped any other with regards to financial markets in 2012. With US and European core inflation below 2% and falling, it's full steam ahead for the printing presses. Milton Friedman expressed concern about a system which "gives so much power and so much discretion to a few men", and "without any effective check by the body politic". Let's hope the Fed and the ECB are doing the right thing in the long run; their track record is mixed. More details below in the Market Update. On staving invested: the consequences of "Coast is Clear" investing Most of the time, we focus here on issues affecting the global business cycle and their impact on portfolio investments, with the goal of emphasizing ones we think offer good value (e.g., large cap US growth stocks, public and private credit), and ones we don't (European equities over the prior 3 years). While these portfolio emphases can be valuable if executed at the right time (i.e., S&P 500 outperformed Europe by 34% since 2010, and Japan by 380% during the 1990's), the benefits of staying close to some kind of "normal" investment position over time has been just as important. Here's an example of how investors sometimes vary from their normal risk objectives, and what the consequences can be. The most frequent example I can think of is "Coast is Clear" investing: waiting for a clear turn in the business cycle before adopting normal investment positions. Start with a highly stylized example involving a portfolio of $100 that can either invest in the S&P 500 or cash. Let's assume the investor decides that in order to invest in the equity market, the following conditions have to hold: • Avoid