Looking Through The Wrong End of the Telescope
You know how when you were a kid and you had one of those collapsible telescopes, how cool it was to make things far away seem up close? And then, you’d turn it around and look through the big lens and everything close would seem so tiny and far away? Okay, so maybe I should have gotten out more. The point I’m trying to make is that I think many investors are looking at the current market environment through the wrong end of their investing telescope. It’s giving them an inaccurate picture of what’s before them.
QE taper terror
Peter Lynch, the genius investor who ran Fidelity’s Magellan Fund for years, commented on the irrelevance of tracking macroeconomic data by saying, “If you spend 13 minutes a year on economics, you’ve wasted 10 minutes.” Seems to me that spending time trying to come up with a meaning for what tapering may affect is probably a waste of all 13 of those minutes.
For instance, Friday’s 220 point intra-day swing by the Dow (which closed down just 14 points after all that) (1) was supposedly a reaction to the release of the latest “most important payrolls report of all time.” Yeah – until the next one anyway. I believe the activity was much more an exercise on behalf of traders to try and position themselves ahead of whatever they thought the Fed will or won’t be doing about tapering on 17 and 18 September when they meet next.
Here’s the deal. At some point – one likely not too far away – the Fed will begin tapering. That’s the fact. The actual timing is pretty meaningless for a long-term investor.
One of the many things that’s always intrigued/amazed me about Wall Street is how good news can be bad and vice versa. Right now, regarding interest rates, what we’ve got going is just the sort of “good news is bad news” thinking that’s a usual part of a market that has a severe optimism deficit. It also demonstrates a big lack of historical awareness, since we know that the economy has been very strong in the past when interest rates were a whole lot higher than they are now.
According to economist Dr. Scott Grannis, since early May, “high-yield bonds have shed over 5%, leveraged bond and preferred equity funds are down 15-20%, equity REITS plunged almost 20% and home builders’ stocks gave up 10-25%. Taken at face value, these indicators suggest that the market believes rising interest rates will short-circuit any nascent improvement in the economy and derail the housing recovery that began some two years ago.” (2) If that’s true, then the market is badly confused.
Time for a change
Rising interest rates – really? How about a little perspective here. Rising from where, exactly? I think it’s totally nuts to suggest that the construction recovery is going to be short-stopped by these rising rates. Puh-leeze. Crikey, our first house in 1984 had a mortgage at 18% – and I assure you I wasn’t the only guy buying that year!!
Relatively speaking, the interest rates over the last couple years have been beyond low. For example, according to Bank of America Merrill Lynch index data, (3), the average rate for high-yield and investment-grade US corporate debt jumped up almost a full percentage point from May to June to 4.3 percent. At that level, rates are still below the average of 6.9 percent in the decade before the start of our bull market. If our economy is normalizing, doesn’t it follow that interest rates should too? Rates have been kept down by the Fed to allow us to get the economy going again. Okay– done deal. Time to let the normal ebb and flow of the markets establish what and where rates should be. Time to look forward, not back.
An improved perspective
If investors are making a mistake, seems it might be in thinking that low interest rates are good and high interest rates bad; that, in effect, interest rates are the tail that wags the dog. Sorry – not the case. In reality, the economy is the dog that wags the interest rate tail. Low interest rates come with a weak economy. On the other hand, higher interest rates are part of a strong economy due to an increasing demand for money from an increasing number of sources.
Calling again on Dr, Grannis, it’s his opinion that the primary purpose of QE hasn’t been stimulative; it’s been to satisfy the world’s demand for safe assets to now. He said that as the demand for safe assets declines, and as confidence returns, then it’s entirely appropriate for the Fed to first taper and then reverse its QE program. The market is now realizing this and that’s why interest rates are up. (4) It’s not scary. As he says, it’s a breath of fresh air. I think he nailed it. These (relatively) higher yields are being created in anticipation of a continually improving economy.
There’s always going to be concerns of one sort or another about the markets and economy.
Staying in inflation-eroded cash or trying to time the market is a definite recipe for financial disaster. Markets have always – and will continue – to fluctuate. That’s why it’s so important to have a disciplined investment plan in place; one that involves a portfolio that’s diversified globally across asset classes in a manner that meets your time horizon and risk tolerance.
Cheers!
- CNBC, 6 Sep 2013
- scottgrannis.blogspot, 3 Sep 2013
- BAML, 3 Sep 2013
- scottgrannis.blogspot, 5 Sep 2013
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.
Michael J. Maehl, CWM®
Senior Vice President
Opus 111 Group LLC
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Spokane. WA 99204-3142
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