Halfway point market attitude check

The second quarter closed last Monday. Suffice it to say that year-to-date US market results are unimpressive. Here’s the scorecard.

The S&P 500 ended fractionally higher for the first half of the year, after ending the recent quarter fractionally lower. The Dow Jones industrial average closed about 1.1 percent lower for the first half of the year with a 0.89 percent loss for the second quarter. The NASDAQ had the best relative performance, up 5.3 percent for the year and up 1.75 percent for this quarter. Global stocks have generally done better, rising 5.6 percent (with net dividends), led by Europe and Japan.

The biggest factors for the overall lack of US market movement, in my opinion, are simply that we haven’t had a meaningful pullback for some time and, just because of that, some people simply believe we “have to”. This together with the coming interest rate increase helps create major uncertainty and directionless markets. In my view, the trend for the overall US economy looks very good, while the market is exhibiting all the usual stresses that come with a shift in what has been “normal” for many years. In this case, low interest rates.

I believe too that many market participants are doing their best deer-in-headlights imitation because most of them have NEVER operated in a rising rate market. I ask you to be aware that markets can still rise when interest rates are (a lot) higher than will be the case over the near-term. (I’ve been there…it’s true.) The Fed’s release on the 8th of the minutes of its last meeting may contain more insight as to what our friendly central bankers are thinking about timing.

Before we become Olympic-caliber conclusion jumpers, and shift money with the headlines, please understand that there isn’t anything about the first half of a market year that predicts the second. In any type market…ever. What these year-to-date results can do is effectively demonstrate the ongoing need to properly allocate your investments across markets, economies and geography.

Attitude check

So, how you feeling about the markets lately? How’s your comfort level with them? What about your own up close and personal view of the economy today? What drives your investment decisions today…the past, today’s goings on or your outlook for your future?

What about six years ago this time? Were your feelings along the same lines as now? That would have been just about four months after what we now know was the start of the current bull market. Were you searching everywhere for stocks to invest in after the previous 18 month markdown move…or not. Whatever your answers, they’re all correct – for you.

What I’m attempting to do is to make a case that your attitude has a huge effect on what you actually, really (no brother-in-law fish stories) realize from putting your money in the markets. My premise is that attitudes are basically emotionally-driven. I believe too that your thoughts can control your emotions. Sure, investment values are affected somewhat by balance sheets and income statements, it’s my experience that investor results are much more decided by the hopes, fears and greed of those same investors and how they respond to those drivers.

I share the view of my friend Brian Wesbury who has said many times that, “Knowledge is the antidote to fear.” My goal with this letter and with the weekly radio program is to give you facts to help you control your emotions when those fiscal hurricanes are blowing.

Here’s a real world example of how emotions have affected investments.

The American Association of Individual Investors (AAII) has a policy of surveying its members monthly for their feelings on the markets. Their 11 June survey had the net percentage of bullish investors at the lowest since 2013. I thought I’d check out how that worked out for those folks in 2013.

According to an Associated Press report on 31 Dec 2013, for all of 2013, the Standard & Poor’s 500 index notched its “best year since 1997”. The index ended up 29.6 percent; with dividends included, the total return was 31.9 percent. The Dow Jones industrial average rose up 26.5 percent. Lastly, the NASDAQ did far better than the Dow and S&P, rising 38.3 percent for the year. Not to suggest we have a déjà vu market going on this year but this type result may be why we refer to this survey as a contrarian indicator…

I have no idea what made folks so timid in 2013. Whatever it was, for those whose attitude was then so negative about the economy and the markets – and, according to the survey, apparently is again today, let me offer you the following as my attitude on that.

I don’t get it!

Yep – that’s my attitude. Though, technically, there are two things about the current market environment I really have a hard time getting my brain around.

One of the “its” refers to a comment I get consistently about my letter and program. That is that my audience likes that I always have a positive outlook. While I am very glad and thankful to hear these comments, it’s also very puzzling to me that simply being positive seems to stand out. This doesn’t mean I’m ignorant of or don’t acknowledge near-term issues. That they don’t change my underlying investing beliefs is probably more accurate.

Nick Murray has consistently observed that, “Optimism is essential to achievement and it is also the foundation of courage and true progress. That optimism flies in the face of ‘the current mood’ is almost reason enough to embrace it, all by itself.” Spot on, Mr. M…no mood swings for me.

The other “it” I’m referring to is why – in spite of the real demonstrable growth by the markets, whether during these past six years or back to the early 70s to keep it in my reality – people consistently avoid giving themselves the real potential to improve their personal situations by staying uninvested in the stock market. My attitude is based on the perspective of daily involvement in the markets over many years. As a result, I’ve become a student of the markets, their histories and, most important, the behavior of folks in all kinds of market conditions.

108

Let me reduce why I can’t see current problems, issues, potential calamities and players-to-be-named-later challenges as cause for moving in and out of the markets – much less staying out of them – to a number, one representing a point on the S&P500. In this case, it’s 108.

Nothing special about the number itself other than it represents the approximate value of the S&P500 when I started in this business. That index opened for trading at 16.66 on 3 January 1950. It closed Friday at 2101. It has never been, as you’re well aware, a totally smooth journey – regardless of when you start or started it. These results I’ve experienced from 108 to today could even be thought of as how well we did…in spite of all the ugly stuff that happened in between.

As a result, and through it all, my personal bias is and has to be positive. How could it not? This is why I don’t get it. Inasmuch as investing is a long-term proposition, the daily and even annual movements in the markets can certainly be interesting…but not usually meaningful. Trading is the short-term, news-driven part of the markets. They really don’t have a lot in common.

The core of the issue is captured nicely in an observation by St. Warren of Buffet himself. He noted that, “People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.” That’s apparently why so many people remain stuck in the 08-09 mentality, in spite of the results since then.

Here’s some positive US economic news to give you an idea of our current trend. With long-term investing, it’s what’s coming, NOT what’s already happened, that will drive your individual stock or market earnings growth.

The trend

Let’s start with the Index of Leading Economic Indicators (LEI). The index is now just below its all-time high set in May 2006. This Index is particularly helpful as it’s designed to provide us an indication of the market and economy over the next 3 to 6 months based on data…not human assumptions. Part of the LEI is the employment report. Jobless claims, when we adjust for the size of our labor force, are at their lowest level ever. Weekly numbers don’t adjust for population or work force size. A significantly positive note is that June was the 64th month in a row with growth in private payrolls…the longest streak since at least the late 1930s.

There’s also been a bunch of good real estate reports – usually the last sector of the economy to recover – coming out the past couple weeks. For instance, we had new single-family home sales move to a 7 year high in May. Sales of used/existing homes moved to a 5 ½ year high, with building permits at an 8 year high. Construction spending rose in May to its highest level in just over 6-1/2-years. The homebuilder survey showed its most optimistic outlook in nine months.
Looks like a fine combination to me.

The latest reading on US manufacturing from the Institute of Supply Management came in with the factory index having its best reading of the year.

And, oh yes. Remember all that baloney about the shale oil biz shutting down and the unwashed having all but written the shale boom (and indeed, oil itself) off? In an op-ed by Donald Luskin and Michael Warren in the 1 June issue of the Wall Street Journal, they stated that,”Leading-edge operators report that they can produce more profitably at $65 a barrel than they could at $95 a barrel three years ago.” Their key conclusion: “The oil patch today is afire with the same technological imperative and competitive mission that has powered the US electronics revolution – think Moore’s Law -to dash headlong down the learning curve, crushing costs and prices and making up for it in volume.”

The takeaway here, I believe, is to never, ever underestimate the creativity, focus and determination of US business people.

Instead of being tied to old ways and means, our society encourages and rewards active failures and innovation. We’ve pretty much re-invented ourselves since 2008 to be much more efficient, effective and competitive. That’s what we do. That’s why we’re leading the world and are nowhere even close to 108 today…

I can provide you a whole lot more of this kind of factual data to help defend against those who continually clamor that the world is ending and/or sky falling. Whenever you feel your unease level rising and you begin considering short-term moves that could affect your long-term strategy, just think of 108.

Summary

Let me close with another quote from Nick Murray taken from an interview this past March. The only problem I have with what he says is that I didn’t say it first…

“I carry in my back pocket more computing power than existed on Earth when I started kindergarten in 1949, and a million times more than E. F. Hutton had when I joined that firm in 1967. I have been almost effortlessly cured half a dozen times in my life of illnesses which, had I been born 50 years earlier, would have killed me. Both these staggering improvements in the quality of life are compounding exponentially.

As the developing world continues to adopt free market principles, it continues to pull tens of millions of people a year out of poverty-first to become producers and then consumers. America remains the most entrepreneurial, flexible, transparent economy in the world. We virtually own science. Nearly all (if not all) of the revolutionary global companies started since the advent of the microprocessor are ours; this country throbs with opportunity….”

A belated Happy Birthday, ‘Murica! Long may you wave…

Cheers!

Mike

Securities and Investment Advisory Services offered through KMS Financial Services, Inc.

To get an overview of economic conditions, use this link. It’s updated monthly. http://www.russell.com/helping-advisors/EconomyMarkets/EconomicIndicatorsDashboard/EconomicIndicatorsDashboard.aspx

Past performance is not indicative of future returns.

Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.

Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.