Everything’s amazing and nobody’s happy

I have no market insights for you this week mainly because there’s not much to be insightful about. Little has changed, with the markets of late having been all over the place with the uncertainty. (For the record, nothing is certain about any markets – ever.) After the trading dust has settled, the markets really haven’t really gone anywhere after their initial drop in late August. In reading recent blogs, news stories, Twitter feeds, etc., I can see why most folks are in a state of seemingly terminal confusion and not optimistic about the country’s direction.

These folks ignore really important news because it happens slowly. They instead obsess over the daily trivial news because it’s continually repeated all day long. The headlines and sound bites are almost always slanted negatively. The writers seem to go out of their way to spin it that way many times.

For instance, here are three examples from my friends at CNBC. Not picking on them – they just pump out a lot of copy and many people read and follow them. In no particular order, we had “NASDAQ ‘death cross’ forms ‘four horseman’ pattern.” (Sounds like the description of a football play for a Knute Rockne Notre Dame team…) Here’s another. “(Carl) Icahn warns of potential looming catastrophe” (emphasis on potential). Last, “Stocks head to lows; may set up for negative year”…and it may not.

Not exactly the stuff of market tops, is it? The tops are where euphoria is the rule of the day – not this herd of cacophonous black swan bird watchers who search daily for the fear du jour to peddle, helping to keep the investors off balance.

I have been accused of being a Pollyanna – I guess meaning it’s impossible for me to see the negatives. I plead semi-guilty…only because I choose to focus on facts instead of these goofy headlines. One of those facts that’s been true over market history is that the trend of the markets and people has been and is up. I’m sorry but I have no patience for all these blues singers. I guess they never look around at what is and instead concentrate on what artificial disaster they can conjure up.

The good stuff

The title of this letter was lifted from a piece by Morgan Housel at The Motley Fool. He listed 50 things we should be happy about in a piece he did earlier last week. Here are a few for your consideration:

– In 1900, 1% of American women died giving birth. Today, the five-year mortality rate for localized breast cancer is 1.2%. As bad as having breast cancer is today. Being pregnant 100 years ago was almost as dangerous

– The average American today retires right about age 62. Just one hundred years ago, the average American died at age 51. Enjoy your golden years — your ancestors didn’t get any of them. “Retirement” per se, didn’t exist until the late 20th century.

– Two percent of American homes had electricity in 1900. J.P Morgan (the man) was one of the first to install electricity in his home… and it required a private power plant on his property. Even by 1950, close to 30% of American homes didn’t have electricity. It wasn’t until the 1970s that virtually all homes were powered.

– Almost no homes had a refrigerator in 1900, according to Frederick Lewis Allan’s The Big Change, let alone a car. Today, you can get a car with a refrigerator built-in.

– The average American work week has declined from 66 hours in 1850, to 51 hours in 1909, to 34.8 today, according to the Federal Reserve. Hope you enjoy your weekends.

– Incomes have grown so much faster than food prices that the average American household now spends less than half on food as it did in the 1950s. Relative to wages, the price of food has declined more than 90% since the 19th century, according to the Bureau of Labor Statistics.

– You only need an income of $34,000 a year to be in the richest 1% of the world, according to World Bank economist Branko Milanovic’s 2010 book The Haves and the Have-Nots. To be in the top half of the globe, you need to earn just $1,225 a year! For the top 20%, it’s $5,000 per year. Enter the top 10% with only $12,000 a year. To be included in the top 0.1% requires an annual income of $70,000.

Because of our strong and vibrant economy, the fact is that, relatively speaking, America’s poorest are actually some of the world’s richest…

What’s all this got to do with the Dow?

Directly, not very much.

What I’m trying to demonstrate is that worrying about current market travails is not unlike saying that whatever today’s weather is will be repeated forever. Like weather, you’ll have fine and not so fine days… just like the market. You’ll get storm fronts that take forever to clear but isn’t it nice when they do?

Like our daily weather, every market scenario is different. The best you can do is study as much market history as possible. And remember as you’re doing so that market history is much more about studying human emotions and the irrational behavior of those humans than figuring out what’s likely to happen next.

Regarding the Fed… lower for longer is the current mantra regarding interest rates. I can’t begin to understand why so many people seem to believe that if rates rise by 25 basis points, (one-quarter of one percent) civilization as we know it will end… for sure this time. Interestingly, many of the same doomsayers who blathered about the “perils of zero interest rates” the past few years are now declaring the economy “too weak” to withstand this “huge” increase. Excuse me – how can you believe that? Over my career, I’ve seen markets rise nicely for long periods with rates a bunch higher than they are now…

Moreover, corporate America is flush with cash and their balance sheets are in a better position for rising rates than at any time in recent memory. The consumer is seeing real (after inflation) incomes rise and, along with that, their spending is up as well. And yes, in spite of the efforts of Congress and the administration, the federal government’s annual deficit is the smallest it has been in years.

Summary

An asset allocation strategy made up of high-quality investments is what you need to have to help you withstand the ongoing flood of negativity – as well as the guts to NOT do anything based on an emotional response. Easy to say and hard to do, I know. But here’s a study from Chris Montagu and the equities research team at Citi to help support me on this.

Chris and his troops found that all you have to do is pick out the high-quality, big, boring stocks with decent profit margins, low debt and reliable income flows and then – sit back and do nothing. Their research showed that this low-key approach has returned 5% to 7% a year, on average, since 1995. Not bad by most accounts.

Please realize that no one can know when stocks will higher after this correction.

Whenever the rebound arrives, it’ll only be clear after the fact. Based on the tone of this letter, it may not be a complete surprise to know that I firmly believe that there’s still plenty more upside left in this bull market. So stay cool, hang on and try to relax. It might be hard at times like these, but I believe you’ll find it’s worth the effort over time.

Instead of setting up a continuous intravenous Maalox drip to help you deal with distress when the trolls are out spouting their world-ending outlooks (remembering, of course, that all you have to do is to just buy their book or subscribe to their letter for how to deal with it), instead break out the bon-bons, kick back and enjoy the benefits of all the good stuff that is ours.

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.