“Davidson” submits:
One thing an experienced investor knows:
1) Economic activity drives markets long term.
2) Market Psychology never determines markets long term. Market Psychology does not drive or predict economic trends even though most investors believe it does.
3) Predicting human response to events has never proven reliable. The reason is that most predictions are dire while human beings are optimistic.
4) We always find solutions which were never predicted to problems we thought carried the most risk. This has occurred time-after-time-after-time.
5) Be optimistic when economics justifies an optimistic stance.
The experienced investor remains ‘Bullish’ till economics indicates one should turn ‘Bearish’. Economic trends turned ‘Bullish’ late 2008 and have continuously signaled economic expansion ever since. Many will predict something with Donald Trump’s victory. Where predictions agree with economic trends, they will appear correct. Some will be touted as good forecasters. Regardless of forecasts, it will be long-term economic trends which drive markets. Long-term economics comes from human activity striving to improve standards of living.
Many claim to track economic trends. In my experience, most investors today are short-term. They invest in anticipation to weekly and monthly economic reports. In short they try to anticipate and capture short term shifts in market prices. Economic data measurement and reporting is an art not a science. The fact that measuring economic activity is an art is revealed by the constant revisions we make and the introductions of new measures over time as we think necessary. Once in a while, we even completely revise an entire series from inception. The goal of investors is to take it all in, sort out what has major importance from what simply adds color. The important economic trends today indicate we should remain ‘Bullish’. The past 7yrs have been much better than many believe.
The important economic trends today indicate we should remain ‘Bullish’.
The economic indicators which matter are the Household Survey (employment), Real Personal Income, Real Retail & Food Service Sales, the T-Bill-10yr Treasury Rate Spread and a recent addition, the Chemical Activity Barometer. All are signaling continued economic expansion. The market value indicator which helps to understand Market Psychology and where investors are along the spectrum from Pessimism-to-Optimism is the SP500 Value Investor Index. Market history shows that markets top-out followed by a major correction occurs only in response to economic correction after a persistent period of optimism and economic excess. Dire forecasts by key investors to geopolitical or other events the past 7yrs (and throughout history) have never proven helpful or accurate. It is not Market Psychology which drives markets, but economic activity. We constantly change the rules to our financial system. Investment outcomes to rule changes have never been correctly predicted. It has always been better to monitor long-term economic trends and invest long-term. Long term economic trends have always provided better guidance in my experience.
There are major imbalances in the global economy today. Experienced investors recognize this. The US$ is ~35% higher than its long term trend. The 10yr Treasury Rate (rising this morning to 1.95%) remains ~3% below the relationship to Wicksell’s ‘Natural Rate’. Even with a long period of imbalance, history shows that these imbalances have always normalized with economic fundamentals. A falling US$ favors Domestic Industrial sectors, Natural Resources and Intl Equities. At the same time rising long-term rates, a sign of investor confidence, is negative for investors who have chased income investments the past 7yrs. This means that long-dated Fixed Income and REIT investors are likely to suffer.
Still ‘Bullish’ till economics indicates one should turn ‘Bearish’. Economics look good for next several years.