The Big Picture

“May you live in interesting times.”

“It is said that the most fascinating times in history are filled with tumult and upheaval, but those living through these changes were probably experiencing trepidation.” The events of the past 6 months may qualify and justify some trepidation for some. The changing of the U.S. administration, ongoing issues in Syria and the middle east, an increase in tensions with North Korea, the ongoing tomfoolery with Russia. O.k., that’s enough! That said, has there ever been a time in history where there wasn’t an issue somewhere? Or multiple issues!? Likely there was not. We can always find a reason for worry. We carry on.

Today, it seems we are all much more aware of the issues and events of the day given the plethora of access to information and opinions. Welcome to the Information Age! I saw Ted Koppel speak about a decade ago and he was asked what his concern was about all this access to information? He agreed it was a good thing. However his primary concern was anyone could put anything out there, true or not! Fake News? I didn’t think much of it at the time but he was spot on.

The Great Debate.

I often discuss that the economy is not good or bad. It is getting better or getting worse. The markets are the same. It is simply easier to assess the markets as the price is reported every day. What is the current state of the markets and economy? After nearly 2 years of slowing and stagnating markets, we are seeing a turning in the right direction. Data over the past several months is improving. However, there remains a “Great Debate” on how long this will last, and the overall quality of the economy and markets. Shocking I know, there is dissension among the ranks!

Have a Plan and a Process!

From the Trenches

“Worrying is like sitting in a rocking chair, it gives you something to do but never gets you anywhere.”

Not to make light of any situation, but there is some wisdom here. The economy is accelerating. Period. It is always difficult to forecast how long this will last or what the future holds. In the immortal words of Edgar Fielder; “If you have to forecast, forecast often!” There is no need to forecast although I know everyone would love to know the future. Keep it simple. The economy is growing and the market is reflecting that fact.

Economic slowing became evident in late 2014. It began mostly overseas, especially with emerging markets, then we witnessed a fantastic drop in the price of oil. Oil is a good barometer on economic activity. The concern was whether we would see broad slowing in the U.S. We did, by early 2015 it was quite evident. However, late last year we began seeing some signs of light. Bullets (data from Bloomberg, Federal Reserve):

  • 6 quarters of falling profits and earnings. We are now 2 quarters accelerating.
  • 7 quarters of declining margins. We are now 2 quarters accelerating.
  •  Approximately 18 months of declining and stagnating income growth. We witnessed the strongest acceleration in the first few months of this year going back several years. 
  • 8 quarters of declining productivity, significant increase in Q4 of last year.
  • Nearly 18 months of a neutral trending market, now back on a bullish trend.

You get the idea. Are there skeptics? Of course there are. Frankly, many of the concerns that we have been discussing are still present. So there are reasons to be skeptical. But in aggregate, we are seeing improvement. The aggregate is what matters. Of course you can always find a reason to worry. But worry, like hope, is also not an investment process.

Bottom line: The broad-based slowdown we witnessed did not materialize into a recession or bear market.  For now, we are back moving in the right direction.   

The Weeds

“Where does an 800-pound gorilla sit? Anywhere it wants to…” 

So what are the concerns? There are a few, and they are worth noting.

Just for fun, not because you asked. If I had to pick: What would be the 800-pound gorilla sitting in the corner of the room?  An easy one would be valuations. Now I am well aware that there is a Great Debate here as well. But this is the topic that I am seeing discussed most often in financial circles. Remember, there is rarely a time when you cannot make a bullish or bearish argument about the economy or the markets. That gets us nowhere! However it is important to recognize the factors in our favor and those against.

Valuations are not a catalyst, but they are the fuel. – RIA  
On some metrics, we are seeing fairly lofty valuations in the market. However keep in mind there are many different approaches to valuations so at times they will conflict. That said, on fairly basic measures, let’s just say we are “up there“. Valuations by themselves are not a catalyst for a material market event to occur. However, from the quote above, they are the fuel! The more highly valued the market becomes the more critical it is for expectations to be met. See my post from January; “Great Expectations”. If projections fall short, it should not be surprising to see the market react materially.

While the coast is not completely clear the storm has pushed off to the distance. However like any ocean-goer knows, it doesn’t take long for the seas to change! Skepticism is useful sometimes but it is important not to allow skepticism to blind you from the facts.

Bottom Line: We can always find good and bad data on the economy and the markets. However it is the aggregate data that matters. One point may be interesting but means very little in the Great Debate!