Fear Strikes Out
All three major US stock market indicators and most commodity prices closed the week just about exactly where they each ended the week before. We did have the S&P500 touch a new, all-time high on Thursday. All in all, it was a week that was good for traders, with news driven, intra-day movements, but mostly non-eventful for long-term investors.
The main non-economic news events had to do with Ukraine and Gaza. If you look at the record, you’ll see and recall that the world doesn’t stop as a result of these kinds of uncertainty. Be careful to not let your emotions cause you to transfer any negative attitudes from these into your long-term investment decisions.
Fear trade
The title of this note is taken from a book about former baseball player, Jimmy Piersall. I thought it made sense in light of how many investors continue to approach the markets.
Over the last few years, you probably remember how many people predicted runaway inflation, bond yields back up past the levels of the early 80s, soaring gold prices, a cratering US Dollar, a stock market collapsing to depression-like levels and scary websites that claim to have predicted the crisis…but have gotten almost everything wrong since 2008. This was, and is, called the fear trade. Part of that trade worked out okay (the gold portion over a few years) but, on the whole, it’s been a big disaster. In other words, fear lost out – again.
In spite of that, a large percentage of people continue to be fearful of something – “the market”, “the economy”, your topic here – and still seem to be looking over their shoulders and under their beds for that something. For over five years, we’ve had a great stock market that has yet to find wide-ranging support and participation due to vague fears such as is the market too high? And, if it does come down, will it go back up?
Historical perspective
On August 13th, 1979, Business Week’s cover story was titled, “The Death of Equities”. I was an advisor in Chicago at the time and remember being quite upset by that. Seemed to me that Biz Week was suggesting that we throw in the proverbial towel; that nothing would be good again. It was written when people were afraid. Here was why. In the body of the cover story, it was said that, “We’re living under double-digit inflation, huge balance-of-trade deficits and a serious energy problem.” Per the article, they had “bonds yielding up to 11% and stocks averaging a return of less than 3% throughout the decade.”
The article was written, as most of the negatively-oriented ones today seem to be, as if whatever negative situation that caused the writing/commenting, was always going to be the case. And yet, even though those were the most important stories at the time, not one of these is even talked about today as an issue.
Additionally, the article argued that we had entered a “new era” of stock investing and the “old rules no longer apply” and that, “even if the economic climate could be made right again for equity investment, it would take another massive promotional campaign to bring people back into the market.” (By the way, Business Week also had a cover story, “Our Love Affair with Stocks” on June 3, 1996. I think you can guess the general drift of that story…)
Lots of it sounds kind of familiar even today, doesn’t it?
Indicators
It’s very frustrating to me that positive developments in the economy seem to be regularly dismissed in some manner or another. As I look at this data – the same as the doomers see, I assume – I see growth expanding from only certain select sectors out to include other areas as the ripple effect of the growth continues. Okay, it hasn’t grown as fast as in the past for any number of reasons. We can’t change that.
The point is that we are growing now, we are expanding now and we’re doing it more efficiently and effectively than we did pre-2007. The stock market has been reflecting this real and anticipated growth since early 2009. Instead of being fearful, it seems to me that an improving economy will also help to support the current and future stock valuations.
Ari Wald is a technical (charts, graphs, etc.) analyst at Oppenheimer. In a report this past week, he identified five events that would signal a bull market top. Those include moderation in the S&Ps uptrend; signs of distribution and narrowing participation of and in stocks; a prolonged period of elevated volatility; a sustained breakdown in the 10 year US Treasury note yield and a spike in US crude oil futures. He and I both agree that the lack of any of these signals now would suggest that we’re not near a top.
One last reference to help reinforce a positive outlook is the Index of Leading Economic Indicators, published monthly by the Conference Board. It’s made up of 10 economic components, changes in which tend to lead changes in the overall economy by three to six months. Some of them include the initial unemployment claims, the S&P500 and consumer sentiment. It’s been positive for a number of months in a row now.
The goal
As an investor, your strategy and overall investing approach is long-term. That thinking has benefited many investors over the years. Don’t forget what you want to accomplish – whether you’re in or close to retirement. Don’t let short-term distractions mess up your methods.
And, for the record, in that “Death of Equities” story, the Dow was hovering around 875 at the time.
The Dow closed a “little higher” Friday…looks like the stocks were actually just resting.
Cheers!
Mike
509-747-3323
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/Markets/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.
