Wednesday, July 23, 2014

Goldilocks and the market --- AND --- those storytellers...

The economy is clearly picking up, with inflation virtually nowhere in sight. Seventy percent of companies having reported second quarter earnings have beaten the estimates. Revenue growth is there as well. And to top it all off, the S&P set an all-time high today amid no small degree of geopolitical turmoil.

So, with a Goldilocks economy and improving corporate fundamentals and, forgot to mention, a largely absent to this point (but now beginning to return) retail investor, there's virtually nothing that can derail this market. Believe it or not, I heard just that in the form of a question from a Bloomberg radio interviewer earlier this week, and in the form of a statement from a guest analyst on CNBC this afternoon.

While I'm not here to throw cold water on a growing glowing consensus, I am here to reiterate reality to you whom we counsel directly, and to you readers out there who either do it yourselves, or who work with other advisers. The reason I reference other advisers is because many of those with high profiles (the one's the major media leverages) and some whom I know personally are, in my view, a bit overly sanguine about today's equity markets.

Beyond the legitimately good economic news, and improving earnings, there remains the reality that the stock market cannot, will not, and by all means should not rise from here in perpetuity. Not that any rational individual would doubt that last sentence, but when I hear some of these personalities prognosticate higher highs with reckless abandon, I sometimes wonder. Having been in this business for virtually my entire adult life, I've come to know only one thing for certain, that markets move in both directions and any one of an uncountable array of possibilities can will pop up and redirect stock prices when you least expect.

So are we, as some believe, in the early stages of a multi-year secular bull market? Or are we an interest rate tick away from the next major bear market? Perhaps and perhaps. I believe I could throw enough select data at you to convince you of one or the other, and all I'd be doing is supporting some bias I have become victim to --- not to mention that I'd be stepping far beyond any legitimate right I would have to profess such certainty, as well as exposing an utter, and most dangerous, lack of humility.

So where does that leave you? It leaves you with your personal biases, and your expectations. If you're an optimist by nature, you believe what I've been reporting of late about the economy (it is indeed getting better [for now]), and you're thinking the equity portion of your portfolio has more upside to run. If you're the pessimist, you see the economic indicators as smoke and mirrors --- at the extreme you see the numbers as some grand political conspiracy --- and you just don't understand how the stock market can be so utterly wrong about what's truly going on in the world.

My advice: While I don't suspect you can, or that you even wish to, overcome your biases, I recommend that you suspend your short-term expectations about where the market goes from here---for you truly can't know. Your portfolio would remain balanced to your time frame and temperament, you'd rebalance it twice a year or so, you'd add when you have extra cash that you won't need for a few years (with blinders [to your biases] on) and, within sectors, you'd rotate as valuations mature and the economy expands and contracts.

Lastly, to nail down my point, here's something I wrote back in July 2012 about the world's biggest (by way of assets under management) bond manager and his prediction that the best days for asset-value growth had come and gone. After last year, I bet he wishes he could have that one back.


July 31, 2012

The “King of Bonds”, Pimco’s Bill Gross, has given the world a priceless gift. He’s accomplished something other mortals have aspired to, but forever at the expense of their credibility. Thanks to Mr. Gross we finally know precisely what to count on, financially speaking, for the remainder of life as we know it on planet Earth. The guessing’s over. I suppose I should re-think my career path.

Apparently the past century of stock market gains and wealth accumulation was a “freak” anomaly, one to never be repeated. His incomparable (out of 7 billion) brain, has put all the pieces together. He has solved the great riddle; he has determined what he’s dubbed the “new normal”: That is, sub historical-average economic and asset-value growth, in perpetuity.

In essence; he knows precisely how all the world’s individuals will transact their affairs for eons to come.

He foresees advances in consumer technology,


and living standards in general.

He can predict the outcomes of political power grabs,

weather patterns,

and natural disasters.

And has gauged the precise impact of each on the global economy.

He has indeed solved nature’s great mysteries.

What forever baffles me is the correlation between the capacity for thinking and the lack thereof for reason. The sad thing (seemingly, but surely not in every case) being: The larger the capacity of the brain (or perhaps the academic achievement, or perhaps the professional accomplishment), the larger the ego. The larger the ego, the lesser the humility. The lesser the humility, the greater the God complex. The greater the God complex, the greater the following. The greater the following, the greater the damage when a black swan (a purely random event) falls from the sky.


No comments:

Post a Comment