Investing by headline can be dangerous to your bank account

The story du jour in this past week’s financial news was that the market’s third quarter, which ended Wednesday, was “the worst in four years!”

What the media spinners left unsaid was that, included within this quarter was the first correction we’ve had in over 1000 days and that, in general, it’s been a pretty dang good four years. Other than that, it was accurate.

Also, be aware that this correction has been nothing special. Since 1980, the average intra-year decline in the S&P 500 has been 14.2%, per J. P. Morgan Asset Management’s research. You could say that, in a somehow good way, we’re below average…

Nonetheless, lots of folks were put further on edge with more negative talk. And then, to top it all off, the September non-farms payroll report came out early Friday (likely the most important one of these ever…until the next one, anyway). It showed lower-than-expected growth in hiring. Investor conclusion: That’s it – we’re done – gotta get out.

Prime demonstration of that response was shown in the opening hour of trading in NY on Friday – right after the release of the job numbers – when the Dow cratered by 250 points. That’s only a 1.5% drop but the 250 point cratering sounds and reads much more dramatically, doesn’t it? Same house – different paint is all.

Many investors are afflicted with something called “myopic loss aversion.” In American, that means that we hate losses over twice as much as we love gains. This often creates a desire to make the losses (and pain) go away so, they sell on the news.

While the third quarter may have been a relatively tough one, Friday saw the Dow and S&P500 each having their biggest intraday reversal of direction in, also, four years. The Dow, S&P and NASDAQ each closed the day, and week, higher. Folks who sold early Friday are likely somewhat unhappy right now.

What about the jobs report?

I’m not an economist – though I do know a few.

To best answer this question – and help you see behind the headlines – I’ve quoted from, in my opinion, one of the best in Brian Wesbury. He’s Chief Economist at FirstTrust portfolios. His comments quoted below came shortly after the jobs news release. By the way, the report showed 142,000 jobs having been added last month, lower than the number the consensus expected of 200,000, while the unemployment rate remained at 5.1%.

Here’s what he said; italics are mine. “No two ways about it, today’s employment report was weak by the standard of the past few years. Job growth was slow, wages were flat, hours fell and the labor force dropped. As a result, a rate hike in October is extremely unlikely….”

Brian added, “Despite the decline in September, workers’ total earnings are up 4.5% versus a year ago and the expansive U-6 unemployment rate fell to 10.0% from 10.3%, as those working part-time for economic reasons fell to the lowest level since 2008.

The bottom line is that today’s report does not spell doom for the US economy; we are not facing an impending recession.”

He concluded with this. “Some context is necessary, as it’s never wise to look at one month’s results and try to draw broader conclusions about something as complex as the US employment picture.” Amen to that, sir.

How’s our economy doing?

Not too badly, all things considered.

First consideration – the United States still has the world’s largest economy, with 22.5% of the world’s GDP – so sayeth Howmuch.net. China, Japan and India together don’t equal our size.

And yes, contrary to the financial media’s “insights”, job growth continues to hum. For the record, per Brian Wesbury again, “the third quarter of each of the past five years (2010-2014) has had slower job growth than each of those years as a whole, and it looks like 2015 will be no different. The job market never moves in a straight line, either up or down.

There are always months that are slower or faster than the underlying trend and we just got two in a row that are slower. This has happened before and will happen again, just like we’ll get months like November/December 2014 when job growth averaged 376,000 per month…the underlying trend (of job growth) is still about 200,000 per month. Other recent news supports this theme.”

Next, housing is usually the last sector to recover from a recession – and ours is starting to get nice momentum. The National Association of Homebuilders’ (NAHB) recent survey showed sentiment among home builders moved up to a 10-year high. Building permits, which are one of the key leading indicators for the economy, rose 3.5% in August and are up nearly 120,000 relative to 2014.

The data on employment, housing, and consumer spending continue to show strength, while the weaknesses in economic data have almost all come from surveys…which likely reflect the sentiments and views of the respondents, as much as actual economic activity.

Many people, due to misleading and incomplete stories, are “ill-informed” about this following bit of very impressive info.

I hear quite often that the manufacturing sector in the US, if not already basically dead, is dying – for sure. Or, equally inaccurately, that we “just don’t produce anything anymore.”
Here’s how you put those comments to bed. Based on data from the UN through 2013, compiled by Dr. Mark Perry – another of those economists I mentioned – on his 1 October post on his Carpe Diem blog, the US alone produced manufactured goods worth $2.03 trillion – that’s some serious output. And, by the way, manufacturing is today about 15% of our total economy.

By comparison, Dr. Perry’s same post also noted that the combined manufacturing output of the next six countries – Germany, South Korea, France, Russia, Brazil and the UK – was $2.14 trillion. I’d say that suggests we’re not quite out of the manufacturing biz just yet…

Why I’m suggesting you shouldn’t fear a near-term recession

I have to acknowledge the unknown unknowns here, for sure. However, the markets are aware of all the comments and concerns – that’s one reason they can be volatile day-to-day.

I also acknowledge that recessions can happen anytime. However, I know of none that arrived stealthily – there’s usually indicators – and right now, they’re not indicating, so to say. And volatility itself is not an indicator of a recession. It only indicates uncertainty.

A point of consideration for the long-term view of the effect of volatility. The 1990s were, so far, history’s longest bull market. Thinking about it, what comes up more in talk of that period: the amount or timing of stocks’ four corrections or…their more than 250% total return? It’s interesting that no one complains about volatility if that moves things up…

By the way, if you want a real expert’s view on the general movements of markets, read Ben Graham’s classic, The Intelligent Investor. The mentor for Warren Buffett discusses what he calls the whims of “Mr. Market” in Chapter 8. If you notice the print date of the first issue, you’ll see his thoughts have significant staying power because they’re still spot on.

Summary

Your biggest investing challenge is probably yourself; your emotions and all the impulses they trigger, in good times and bad. As noted earlier with that behavioral investing study, we’re hard-wired to want to erase any trace of negativity from our investments.

We at Opus still very much believe your best move is to hang on and avoid the temptation to do anything with your investments you’ll regret later. Of course, this advice assumes that your current portfolio allocations are in line with your stated investment strategy and risk tolerance. If you do have questions or concerns, or want a second opinion without obligation, we always welcome you to contact us to set up a one on one conversation.

Or, you can use the following bit of “insight” from an economist I don’t know but who must have been the honor grad at the Heads You Win – Tails You Lose School of Marketspeak…

“We could see the economy accelerate; we could see this global weakness pass,” said Brian Rehling, co-head of global fixed-income strategy at Wells Fargo Investment Institute. “But you could also see things go the other way, where the global economy continues to weaken.”

He’ll never be wrong – or right – either.

Cheers!

Mike

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

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