(Image: ThinkStock)

Investors will continue to face off-the-charts volatility. Many reeled from yesterday’s market activity as global markets plunged in response to the alarming European debt crisis.  The performance of all three major indices was their worst in the past few months. The S&P 500 index suffered one of its biggest drop since August, sliding 3.7 % to 1,229. The Dow Jones Industrial Average dipped 389 points—its worst one-day loss since Sept. 22—to 11,781.  And the tech-driven Nasdaq composite index fell 3.9% to 2,622. The decline erased gains etched out after a two-day winning streak.

The culprit: news that the crisis spread to Italy, Europe’s third largest economy. For the first time since joining the 17-nation Euro currency zone, the interest rate that Italy must pay to borrow money rose more than 7% for 10-year bonds, putting into question the country’s viability as it goes through a major transition in political leadership and proposed austerity measures.

Worries over Greek debt have increased volatility in the financial markets for the past year and that country’s bailout has been a long, arduous process. At $2.6 trillion, Italy’s debt is much larger than than that of Greece and two other troubled European countries that had to be rescued—Portugal and Ireland. The challenge: Unlike those smaller economies, Italy is viewed as too big for the same type of international bailout but too big to default. Analysts and government leaders agree that international intervention is imperative.

But on Thursday morning, the markets staged a comeback. The yields on Italian 10-year bonds dropped to 6.93% helped by secondary-market purchases by the European Central Bank—an action that steadied European markets. And U.S. stocks regained momentum after Standard & Poor’s maintained France’s AAA credit rating. By mid-day, the Dow was up 118 points, the S&P 500 rose 6.58 points, with energy stocks as top performers and tech lagging among its 10 major sectors, while the Nasdaq Composite fell 2.71 points.

Expect more market turbulence as the European scenario—and other major economic and financial events play out.

Europe represents more than 25% of the world economy. The financial crisis continuing to spread to other parts of the continent would be disastrous since its our largest trading partner and, in turn, such activity would affect business and employment on our shores.

Analysts from Moody’s Investors Service, one of the leading ratings agencies, recently announced it was concerned that the U.S. economy could be hurt if this catastrophe. The situation, they assert, would be similar to the aftermath of the 2008 bankruptcy of Lehman Brothers in which banks suddenly became less willing to lend to each other, creating a credit crunch for companies and individuals.

Don’t expect an American bailout as we grapple with our own sluggish economy. For example, President Obama has not commented on recent developments since he appeared at the G20 Summit in Cannes, France last week, urging European leaders to take “bolder action” to avert contagion. And when asked about Europe’s woes during the GOP debate last night, Republican presidential candidates were emphatically against any direct aid to stem the crisis. Mitt Romney‘s comment mirrored the sentiment of others: “Europe is able to take care of their own problems. We do not need to step in to bail out banks in Europe or here in the U.S. that may have Italian debt.”

In such a tumultuous environment, what should you do as an investor? I suggest you continue to follow the advice we offered in the Money section of our October issue. the strategies include:

• Adopt a long-term focus. By doing so, you can actually afford to not pay too much attention to market turbulence. Our experts tell investors not to panic and avoid making knee-jerk decisions you will regret when the market settles down.
• Stick with market leaders. Look for quality stocks with proven earnings track records and strong cash positions.  Some money managers maintain that multinational companies with revenue streams from different geographic locations will still offer downside protection.
• Look for value. Now is a great time to buy solid companies at bargain prices to gain some rather attractive returns—especially in battered industries like financial services.
• Purchase dividend-paying stocks. There are a number of companies that still manage to significantly grow earnings, generate free cash flow and offer strong dividend yields right now.

These are but a few approaches to bolstering your investments. Remember: Monitor, don’t ignore, the financial markets and make adjustments to your portfolio. Avoid your own investment crisis but not letting volatility force you to make a hasty exit from the market.

How will the crisis in Japan affect your portfolio? (Image: Thinkstock)

As Japan struggles to recover and rebuild from one of its worst crises, money managers and investment analysts assess the aftermath and what it means for financial markets and investors. BLACK ENTERPRISE interviewed a number of leading black asset managers to get their take on the impact on American industry. In fact, some believe investors may find future investment opportunities within Japan itself.

“Frankly, we’re learning more each day that the range of outcomes is extremely wide. I’d say regardless of what happens it has obviously been a terrible tragedy and it’s very unfortunate,” says Jason Tyler, a senior vice president at Ariel Investments L.L.C. (No. 5 on the BE ASSET MANAGERS list with $5.1 billion in assets under management). “There’s a lot of money that’s going to have to be repatriated and as they dig out and rebuild and assess the damage, and try to get their infrastructure intact. So they’re going to be spending a lot of their money internally in trying to get the country back on its feet in the next several years.”

Japan’s devastation confirms Tyler’s assertion. On March 11, the nation faced a cataclysm unlike any it had before – a 9.0 earthquake, a 20-foot tsunami and a nuclear threat.

As the world responded to those events with donations, the financial markets responded with panic. Five days after the crisis, the benchmark S&P 500 index fell a staggering 3.6% to 1,256.88. During the same period, the Chicago Board Options Exchange Volatility Index, or VIX—Wall Street’s barometer of investor anxiety—reached its highest level since July 2010.

What a difference a week makes. When the market closed on March 25, investors seemingly recovered from the post-tsunami shock. After the Commerce Department’s reported that the US economy grew at a 3.1% annual rate in the fourth quarter, the S&P 500 rebounded to close at 1,298. The VIX slid 42% since March 16, the biggest decline in more than two years.

Even with the current spurt of investor exuberance, a number of money managers maintain it is still too early to forecast the extent of long-term industrial damage but they expect considerable wreckage in the automobile and tourism sectors. They maintain that investors should take note of such trends to spot portfolio-building opportunities.

As far as its impact on US business Tyler says the auto industry definitely will take a hit because of unavailability of parts that could halt production for a significant period of time. Manufacturers that produce hybrid cars are among the most vulnerable.

“Even if a lot of cars are assembled here, the availability of parts is really the key. They can be surprised by what’s going to be impacted because it could be just one or two key parts that can slow production so it’s something that everybody’s watching,” Tyler says.

Eric McKissack, CEO of Channing Capital Management, agrees.

“The disaster is affecting US and global business and could have a trickledown effect on small and black-owned businesses. It could impact the auto industry since so many cars are manufactured in Japan as well as some of the technology like chips,” he says. “Prius and other popular hybrids are all manufactured in Japan but I’ve heard there’s only a month’s supply. Many Japanese manufacturers have plants in the US.”

McKissack also predicted that retail and tourism sectors could be negatively impacted because Japanese tourists frequently travel to the US and are large consumers of luxury goods. Japan ranks behind Canada, Mexico and Britain as the largest source of our nation’s tourists. In 2010, the U.S. drew 3.4 million Japanese visitors, who spent, on average, $4,500 per person per visit, behind only the Chinese, who spent an average of $6,800 and Australians, who doled out $4,700, according to the Commerce Department. Moreover, The International Air Transport Association, the trade group representing the world’s largest airlines, reported that it expects a major slowdown in air travel to and from Japan, which accounts for 10% of the industry’s revenue.

Dawn Alston Paige, executive vice president of Piedmont Investment Advisors L.L.C. (No. 9 on the BE ASSET MANAGERS list with $2.9 billion in assets under management) suspects that any financial impact will be temporary at best. She anticipates some supply chain disruptions for technology products, however.

“Typically after natural disasters, the governments will come in and there will be a big spending boom as they rebuild and it spurs economic growth,” she said. “So there’s probably going to be a couple of quarters of negative impact, assuming the global growth continues, but I think higher oil prices are a bigger concern than Japan.”

The good news is that there may be some lucrative investment opportunities on Japanese exchange-traded funds, particularly when the market plunged in the early days of the disaster. Even while aftershocks from the earthquake rocked financial markets, according to the data from TrimTabs, an investment research organization, US investors poured $1.2 billion into Japanese ETFs, the biggest weekly inflow on record. It was a sign that bullish investors foresee a market rally.

Asserts Alston Paige: “It’s a very reasonable place to look for investment opportunities. I think a lot of the smart money has already gone in and recognized that. I’m not sure what the total damage was once the market opened, but it’s a way to buy into a rebound in Japan. You could even call it a dead cat bounce which would be much more speculative.”

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Wayne P. Weddington III, portfolio manager and managing partner at Brunswick Capital Partners. Author of Do-it-Yourself Hedge Funds (Hachette; $24.99).

The reason for the rally:

I think a lot of the market activity in the last 12 months has been speculation. We’ve also had a tremendous collapse in market fundamentals. I am personally one of the people that think it is overshot. There is a lot of uncertainty in the market. We have a lot of exogenous activity.

The word on the street [is] that people have really been trading technicals because the fundamentals haven’t really taken strong direction. [This means people are buying] more in terms of price action. If you are a speculative investor, the market rallies and you want to participate and it becomes a self feeding proposition. No one wants to be [the one who didn’t get in on the market action].

Predictions for the coming year:

The Fed … knows interest rates will increase. They are walking a very delicate line. Rates will continue to inch up slowly as they get evidence that the economy is [improving] I think what they did do was truly avert a [crisis].

Advice to investors:

Buy on a sector basis. Some of them make fundamental sense. Capital goods will continue to perform. Technology will continue to market perform or better because even in difficult economic times people still want their iPods. Consumer noncyclicals will continue to perform. It has been a standout at about 22%. To short the market against it would be a profitable trade.

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Eugene Profit, CEO of Profit Investment Management in Silver Spring, Maryland

The reason for the rally:

There was a lot of pent up demand because stocks had gone down so much, and I don’t think anyone thought that we would see a [more than] 60% rebound off the bottom. From my vantage point, you can’t really point to one thing or another [other] than just low interest rates and investors wanting to own stock for the potential of high returns. It developed its own momentum. A lot of the investors kind of looked at all of the data with more of a positive eye than more of a jaundiced eye.

Predictions for the coming year:

Looking at a little bit of the improvement in earnings calls that have come forward, the economy has gotten a little bit better. I think right now it looks like you may see [the market move] another 10-15% higher from here. That being said, in the short term there are a lot of reasons to think that maybe we came too far too fast and you might see some investors heading for the exits and taking a wait and see attitude. Investors are becoming a little bit leery and you’re starting to hear the commentary that this run up in stock prices isn’t supported across the board in terms of what you saw with corporate profits.

We still have some issues where the economy hasn’t completely rebounded–not even close. Unemployment is still way too high. Demand still hasn’t picked up in a lot of different areas. The fed has discussed pulling some liquidity out of the system and buying the debt instruments that have been used to support interest rates staying very low. A big rise in interest rates is going to choke off stock market gains and also impede economic growth. But this being an election year I don’t think you’re going to see any of that.

Advice to investors:

[Considering the low interest rates, the deficits, and that] unemployment is still very high, when you put all of that together it is all the more incredible that the markets had this big of a run since the March lows of last year. That is why you have to be in [the market]. It doesn’t work in any direct pattern where you can point and say if X happens Y will happen. You really do have to stick to your investment discipline and really buy in all markets and sell in all markets.

Douglas Coe, chief investment strategist and managing partner of investment banking and capital markets at Moody Reid Financial Advisors in Kansas City

The reason for the rally:

I believe president Obama is reining over one of the biggest stock market rebounds in American history. I’ve been on Wall Street over 18 years. This is one of the biggest bull markets I’ve seen. I don’t think it has dawned on anybody yet but if you bought in right after he was sworn in you made a killing.

The market rallied back because… people tend to move when they invest in a herd like mentality. There were a lot of uncertainties heading into 2009 that people were just not clear of the direction on key economic fundamentals of the United States and the global economy. Once we saw [there was] a transition of power…[and that]… President Obama, was very capable and understood the surrounding economic factors that needed to be addressed, the market exuded a lot of confidence. [We knew] that although the short term would be choppy, the long term prospects for the country and the world looked great.

Predictions for the coming year:

I believe [the rally] will continue because no one expects it too. I’m very bullish and very noticing of healthcare. I just simply believe that no matter what side of the aisle you’re on we’re going to do something fundamental…to address this healthcare issue. I don’t know if everyone can agree to all the aspects of it, but one thing you know is that people… will need healthcare, food, clothing, and shelter.

If you are looking at a longer term view, it is a really good time to look at the housing situation. I don’t believe in 10 years you will be able to buy real estate and land this cheap again. You tell me with a growing population people aren’t going to need housing in 2030.

Advice to investors:

One of the things you have to really resist doing: don’t be so day to day. Take a step back. Look at the long term. A lot of times we get hung up looking at the share price day in and day out. That is not how you make real money. The greatest times to invest are when things look the worst.

You have to now more than ever diversify. Use dollar cost averaging over time. You inherently buy more when prices are less and less when prices are high. That’s the key. Don’t look at it this week, next week or next month. You have to be forward thinking, but most importantly you have to be forward doing. The winners over the next years will be those that see tomorrow, today.

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I’ll explain: Last year at about this time, as the markets were beginning their history-making nosedive, my wife and I took a third of our 401(k) savings out of equity-based funds. We left that portion of our nest egg in our account, but set it aside in cash, where it earns a minimal amount interest. It was a panic move, but one we didn’t regret—until recently. Over the past six months, as investors responded to improving economic data and stronger-than-expected corporate earnings reports, the S&P 500 index has gained nearly 50% since its March bottom. Mostly, our investments took part in the market’s resurgence. But still, I’ve had a nagging feeling that our sidelined cash should’ve been back in equity mutual funds sooner.

Of course, I’m not alone. Many investors made similar moves last year, socking away portions of their invested savings into money market accounts or short-term bonds where it would be safe from the stock market mayhem. Still feeling a bit shell-shocked from losses, some haven’t put their cash back into the market.

For myself, and other somewhat sidelined investors like me, this autumn may present an opportune time to increase exposure to equities—at less expensive valuations. Here’s why: A number of market-watchers (Read here, here, and here.) expect that sometime this fall, the market is due for a slight pullback. For starters, over the last 50 years, the market has lost ground more often in September than any other month.

Aside from that, there’s been a recent surge in stock sales by corporate insiders, which is sometimes indication of a rally’s peak. In general, experts also believe that investors may have become overly excited by the prospect of a fast, and smooth economic recovery and corporate earnings reports that reflected, in many cases, gains from cost-cutting rather than top-line sales growth. Make no mistake– the U.S. economy is on track to recovery in 2010, according to most economists. It’s just that investors may have gotten a little ahead of themselves this summer. As Art Hogan, chief market analyst at brokerage firm Jeffries & Co., told the Los Angeles Times earlier this week, the expectation of a sharp pullback “is ubiquitous now.”

Investors shouldn’t be alarmed by the gloomy near-term outlook. A market pullback is a buying opportunity, a chance to ease sidelined cash back into stocks at more reasonable valuations. Look at these dour forecasts another way: as a 30-second TV ad for an impending sale at your favorite store. I’ll be watching—and hoping to make up for missing out on the rally. Who’s with me?

John Simons is the senior personal finance editor at Black Enterprise magazine.

I’m happy to report that investors who’ve heeded the advise of Black Enterprise’s stock-picking experts for the first half of 2009 are experiencing higher gains than they would have if they’d invested in a fund that tracks the S&P 500 Index. In 2009’s first six issues of Black Enterprise magazine (which appeared in subscriber’s mailboxes between Dec. 12, 2008 and May 22, 2009), six financial experts touted 18 stocks (three each) as part of the magazine’s  “Stock Picks” feature. The entire group of stocks posted a total return of 9.13% through mid-July (measuring from the time of publication for each pick), compared with the S&P 500’s gain of 6.78% over the same period.

Of the experts who participated in Stock Picks ending with the June issue, Morningstar analyst Daniel Holland (featured in January) selected the best-performing basket of stocks, suggesting that readers look at industrial companies Watsco Inc., Emerson Electric, and Thomas & Betts. Those companies’ shares jumped a collective 24.24% through mid-July.

It’s no easy feat choosing winners in this environment, as I’m sure Ted Parrish, principal and director of investments at The Henssler Financial Group, can attest. For our June 2009 issue, Parrish picked three stocks (General Electric, iShares Dow Jones, and Stryker Corp.) that have, thus far, been the worst-performing group-of-three. They were down a total of 2.9% by mid-July. It’s important to remember, however, that BE’s Stock Picks are meant to be relatively long-term investment plays. So, keep watching.

The stock market’s freefall is anxiety producing. But getting paid to wait it out can take the edge off. The logic behind seeking out dividends: “A dividend comes from the actual operations of a business that you own a part of, as opposed to speculating that someone will pay you more in the future than you paid for the stock,” says Josh Peters, editor of Morningstar’s Dividend Investors newsletter and author of The Ultimate Dividend Playbook: Income, Insight and Independence for Today’s Investor (Wiley; $24.95).

Recent equity declines have boosted dividend yields (dividend yields, like bonds, have an inverse relationship to prices, so they rise when prices fall), making them look even more attractive. The average dividend yield for the S&P is now 43.14%. That may not seem like much, but compare that to the 2.9% of the 10-year Treasury note. The last time stocks yielded more than bonds was in 1958. “That’s how fearful investors are becoming. They’re willing to lock up their money for 10 years and earn almost nothing instead of buying stocks,” says Charles Carlson, editor of the DRIP Investor newsletter in Hammond, Indiana.

Show me my money

To dividend lovers, the fact that a company is giving its shareholders cold hard cash says something about the way it’s run. “If you give management too much capital they are likely to destroy it,” says Cliff Remily, manager of Santa Fe, New Mexico-based Thornburg Investment Income Builder fund, which focuses on dividend-paying stocks. “Unless you can prove to me that you’re going to reinvest a dollar of earnings better than I’m going to reinvest it, I want the dividend.”

Peters of Morningstar also notes that firms that make a commitment to pay dividends tend to have little debt. “In order to pay a dividend, you have to have a profit-generating business and be able to earn something,” he says. That might explain why members of the S&P 500 that consistently boosted their dividends, or initiated them, gained an average of 10.4% since 1972; those that didn’t returned just 8.2%, according to Ned Davis Research. Those 2.2 percentage points a year add up over time.

A note of caution

Dividends might sound good in this market, but as with any investment, some caveats apply.

First, don’t be tempted by an overly generous payout. True, even blue chip names are sporting yields of 5% and 6% these days due to price declines, but a yield that’s way out of proportion to the rest of the market probably means trouble. “When you see [really high] yields, the market is saying that it doesn’t have a lot of confidence that those dividends will be sustained,” says Carlson. Sure enough, there were 61 dividend cuts or eliminations during 2008, as companies, including many in the financial sector, have either suspended or cut their dividends in the last year.

One way to tell whether a company can afford to continue paying is to look at its payout ratio, the proportion of earnings going toward dividends. The lower the ratio, the more likely the dividend is safe. “I would look for a stock that pays no more than 60% of earnings to shareholders,” says Sam Stovall, chief investment strategist with Standard & Poor’s Equity Research in New York. A company still needs to retain some earnings or cash flow to invest back in the business.

Also, look for companies with a history of increasing their dividends, such as those that populate the Standard & Poor’s Dividend Aristocrats list, which have raised their dividends in each of the past 25 years. “If you’re buying a stock for its income, then you want that dividend to grow and grow and create enhancement to your purchasing power,” says Peters.

And, finally, steer clear of firms carrying too much debt. Paying back lenders takes precedence over shelling out for dividends.

This story originally appeared in the June 2009 issue of Black Enterprise magazine.