In due course, markets can, do, and will correct. Indeed a valuable overstatement yet one that bears reminding especially after years of frothy returns. To that end, it is well worth mentioning that corrections can, do, and will often persist longer then they should. By their very nature, corrections will test patience and trick emotions, tearing the most stalwart investment scheme and shredding it to ribbons.
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With the S&P 500 currently bumping up against two month highs, our minds are befuddled with all these infinite possibilities of where the market will go tomorrow or in the next year from today’s starting price. Truth be told, no one knows what the market will be worth tomorrow. Even with a boundless array of observable input parameters – no one can tell you. It’s all left to guess.
An expert can estimate tomorrow’s weather, when the next lunar eclipse will happen or how many adult men will live to be 110. Specialists apply different models that will produce dates, times, or regularity of such events. But a financial analyst, risk-manager or econometrician does not have this luxury. They are at the mercy of a sophisticated model that is dependent on something that doesn’t exist in the markets – probabilities. To simulate where the S&P 500 will be trading assuming consensus third quarter earnings, global growth momentum, and Fed lift-off is an extremely difficult but somewhat doable task. Simulating a market condition – or price level – with infinite possibilities as inputs is a fool’s game. It’s impossible.
Comfort Principles Cannot Drive Sound Investment Decisions
As a longtime FOX Business News guest contributor, I’ve never sought to please or entertain; instead I attempt to captivate the viewer with a style as intimate and frank as a handshake. My antagonists - the financial “marketeers” - are largely a mass of mendacities, evasions, folly, and trap doors. They use bold claims, smooth metaphors, similes or other figures of speech to tempt you into chasing the next big thing. I preach real diversification and doing so when you can – not when you have to.
They make bold statements – claims about the future and offer no evidence for their reasoning or their track record. And, the more confidence they possess, the more likely they can blunder and bust their way to your heart and wallet.
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They seduce you with metaphors, similes, or other figures of speech. We are plagued with the pre-fabricated phrases that substitute simple, clear prose. We are plagued by “kick the can” and “axe to grind” – meaningless images that every viewer subconsciously acknowledges represents the opposite of real thought.
Personally, I find it severely intimidating to keep track of my forecasting accuracy – even in environments where there are foreseeable regularities. Sure, I was dead right about a few market turns in 2010 (e.g. my FBN proclamation to be long equities in early 2010 or my call that the U.S. 10-year yield would fall below 1.5%) yet, even I neglect that I did say, “I couldn’t imagine oil dropping below $70/bbl. (7/14)” etc. etc. etc. Five plus years of television have taught me that there is some sort of perverse inverse relationship between having the skills that go into being a solid market prognosticator and having the skills that go into being a good media presence. I wish I could figure that one out.
The Various and Sundry
Five of the six stocks that have contributed the largest return attribution to the S&P 500 include: Amazon (AMZN), Facebook (FB), Alphabet (GOOGL), Netflix (NFLX), and Starbucks (SBUX). At an average price-to-earnings (P/E) ratio of 100+, I would not touch them with a 10-foot pole.
For all the talk of the mediocrity of U.S. economic numbers, it should be noted that there continues to be solid household formation growth, mortgage credit growth, and solid real consumer spending. Call me crazy but I think inflation is closer than anyone of us would guess.
A day doesn’t go by where I don’t read accounts that industrial metals including copper, aluminum, and nickel have hit six year lows – inferring some sort of parallel between today and the “Great Recession.” Don’t the writers of these headlines realize that it’s not 2009 where GDP was deeply negative? It’s simply a trend – if it was anything otherwise, don’t you think equities would take notice?
Remember that no matter what you’ve seen, heard, or read, the Federal Open Market Committee (FOMC) wants to move away from emergency monetary policy maneuvers.
A Market Taken Out of Context
“The FOMC will raise rates”. This is a fairly clear statement, but its meaning varies with the context. The context delivers an implicit narrative, and the force of the statement depends on the role that it plays within those different potential narratives. “It’s going to rain.” Whether or not the reader responds to that statement with excitement or chagrin depends solely on the context. If the context is a central California drought-ridden farming community, then a proclamation of rain is great news. But if the setting is a family en route to the beach, “it’s going to rain” is met with great disappointment.
I’m afraid presently the words “the FOMC will raise rates” is trapped within a flawed setting; using tepid economic data as justifiable means for a rate hike delay until March or even June, 2016. My context is one whereas the FOMC will raise rates by year-end notwithstanding the data (unless it’s absolutely wretched) and for no other reason than the Fed has signaled this desire for months and is anxious to rid themselves of emergency measures and begin the long journey to interest rate normalization.