Waiting for the Positives to Outweigh the Negatives in the Market

In the face of recent market volatility and the spate of negative financial news, many investors are getting nervous about meeting their goals. While long-term growth in the markets provides returns, long-term success comes down to the confidence to stay the course and continue to work your plan in the face of uncertainty. So how do we maintain that confidence in the face of the doom and gloom reported by the financial media?

The thing is, there’s always another side to the story. No matter what time period you examine, there are always going to be reasons to think the markets are going to go down, and there will always be reasons to expect them to go up. In spite of these conflicting reports, you just need to stay the course and work your plan.

We see the same story today. Optimists have plenty to get excited about while pessimists have plenty to fret over.

Let’s look at some of the good news first:

  • The Federal Reserve Beige Book is a document that summarizes comments received from businesses and other contacts outside the Federal Reserve. It is an “on the ground” view of what is happening in the economy. Reports from the 12 Federal Reserve Districts indicate economic activity continued expanding across most regions and sectors during the reporting period from July to mid-August. By and large, the reports from the “real economy” have shown economic growth.
  • The International Monetary Fund (IMF) has revised gross domestic product estimates slightly upward for 2015 and 2016 for advanced economies, and downward for emerging and developing economies. For 2016, the United States is projected to grow at a rate of 2.80%, while the global economy as a whole will average 3.60%. Emerging and developing economies are projected to grow at 4.50% – less than in years past, but a strong number nonetheless. Some of the best projected growth rates are coming from emerging and even troubled economies. The much maligned Chinese economy is projected to grow at a 6.80% rate for 2015.
  • In the summer real estate selling season, we heard from several clients and others that placed their homes on the market for more than expected and found the property under contract in a matter of days. On the buy side, some were beginning to get frantic about not being able to find what they wanted in a home at a reasonable rate – a sure sign markets are heating up.
  • We interact with banks and credit unions frequently as clients seek financing or refinancing of real estate purchases and holdings. For the first time in recent memory, we began to hear complaints of unreturned phone calls and e-mails, frazzled financial officers, and other indications of poor service. Upon investigation, we heard laments from staffers of overwork.

It’s difficult to reconcile the above reports with some of the negative things we are hearing. For example:

  • The IMF expects US consumer prices to increase by at 0.9% for 2015, still a reasonable level given years of stimulus and other perceived inflation-producing measures.
  • The labor participation rate is at a 62.4% level, close to a 38-year low, which has been held up as an indication of under-employment and workers giving up on finding work.
  • The main driver for headline US inflation in 2015 has been the 50% drop in oil prices in 2014. The CPI (Consumer Price Index) has been negative on a year-over-year basis, with gasoline accounting for 4.5%.
  • US housing costs are expected to rise by an overall 3% in 2015, driven by the lagging impact of higher home prices and a low vacancy rate, but showed a year over year increase of 4.49% for the 12 months ending in July.
  • Where is the much anticipated “energy dividend” for both businesses and individuals for 2015? Has it been baked into expanded hiring and wages for businesses and housing for individuals? Are there additional economic impacts to be realized from lower energy prices, and will it be enough to offset decreased investment and hiring in the energy patch? Generally, rapid drops in energy prices have both been economic stimulus and depression in energy-producing states and nations. Are these companies and regions doing a better job managing the downturns? Are global low interest rates helping smooth the energy price drop?
  • Consumer prices are projected to increase by a 0.3 rate in advanced economies, and a 5.6% for emerging and developing economic, which is indicative of lower commodity prices, an increase in economic activity and a few hyper-inflationary trouble spots.
  • The dollar is doing very well against the Euro and is on a multi-year high against the Yen, yet it has had seemingly little effect on the US economy and exports. Will that change as rates stabilize, or have the combination of changes to trade, low interest rates and corporate management of currency exchanges combined to mitigate the effects?

With all these factors on both sides of the coin, we can sympathize with Harry Truman, who, after tiring of economists telling him, “On the one hand this,” and, “On the other hand that,” asked to be sent a one-armed economist.

With a number of positive conditions apparent, what do the negatives mean? Over time, they mean surprisingly little.

Markets rarely move in one direction for long. If they did, there would be little risk in investing. And in the absence of risk, there would be no return. One element of risk, although not the whole story, is the volatility of an investment.

Look at a world stock market benchmark like the MSCI World Index in US dollars. From 1970 to 2014, the index has registered annual gains of up to 41.9% (in 1986) and losses of as much as 40.7% (2008). With such extreme highs and lows, the index still delivered an annualized rate of return of 8.9%. To earn that return, you had to remain fully invested, taking the unsettling down periods with the heartening up markets, but also rebalancing each year to return your desired asset allocation back to where you want it.

Timing your exit and entry successfully is a tough task. Look at 2008, the year of the global financial crisis and the worst single year in our above sample. Yet the following year, the MSCI World index registered one of its best ever gains.

None of this is to imply the market is due for a rebound anytime soon. It might. It might not. The fact is no one can be sure. But we do know that whenever there is a great deal of uncertainty, there will be a great deal of volatility.

Second-guessing markets means second-guessing news. What has happened is already priced in. What happens next is what we don’t know, so we diversify and spread our risk to match our own appetite and expectations.

If you focus on short-term negatives to the extent it changes your long-term planning, you could miss out on returns and therefore the attainment of long-term goals. In the short term, the greatest contribution you can make to your long-term wealth is exercising patience.

 

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