1.3Q
Earnings Preview….Energy and Tech Biggest Projected Declines.uu
Higher input and labour costs are
expected to have further crimped profit margins. The average net profit margin
is expected to fall to 11.3 per cent in the third quarter from 12.1 per cent in
the same quarter last year, according to FT – Energy is poised for the
biggest drop in earnings after a fall in US crude prices in the third quarter.
The tech sector, caught up in the US-China trade war, is next with EPS
projected to fall by more than one-tenth, according to FactSet. Revenues are
estimated to increase an anaemic 0.3 per cent.
This week’s fund flow numbers from the Investment Company Institute showed that the long, steady rotation from equity mutual funds and exchange traded funds to fixed income funds has continued. As shown below, the spread between equity fund flows and fixed income fund flows has reached a net reading of -$165.9bn over the last three months; that’s among the largest net flow out of equities and into bonds since the data starts.
Fixed income isn’t the only place that retail has been moving allocations to. As shown in the chart below, 13 week commodity fund flows have been among the largest of the periods since the data for ETF and mutual funds combined begins.
Investors are loading up on cash. That’s not a good
sign.-By Andrea Riquier
An analysis from research firm
DataTrek, drawing on fund flow data from the Investment Company Institute,
shows that there was $3.4 trillion in U.S. money market funds as of October 2.
That’s about 14% higher than at the end of 2018, and has risen nearly every
week since May.
“What’s strange about this recent influx of capital is that
short-term rates have been declining all year,” DataTrek founder Nicholas Colas
wrote. Money market funds “are seeing strong inflows in 2019 even as 2-year
yields have been cut in half,” he added.
The paranoia around
presidential elections is hitting record levels, we better stop and listen to
what’s going down. We spend a big portion of our life listening to
storytelling. As kids, parents and teachers tell us stories. As
adults the news media is about storytelling, investing is about storytelling,
and nothing paints a better story than politics. I may be early with this
letter as the presidential election is more than a year away but it’s possibly
shaping up to be the ultimate scary story for investors.
As I write this letter, it is
increasingly looking like a Trump vs. Warren election and a Trump impeachment
investigation, which may be the ultimate binary event for American
voters. Never in history has an election been so important except for
every other election in history. Most of my conservative friends thought
the world would end if Obama got elected and most of my liberal friends thought
the world would end if Trump got elected.
If you made either of those
investing bets based on politics, your wallet is probably lighter. The
chart below shows that Obama obviously did a better job with the economy.
Actually this would be a false assumption, as Obama took office when the
S&P was trading at generational low valuations. The single best
predictor of future returns is where valuations are today, the next President will
not have the luxury of beginning his or her term with low valuations.
The
U.S. labor market keeps chugging along, despite signs of weakness in other
pockets of the U.S. economy.
Nonfarm
payrolls rose 136,000 in September, and July and August payrolls growth were
revised up by 45,000. The 12-month average payrolls change climbed to 179,000
including Friday’s data, still slightly higher than the expansion average.
Overall,
the September jobs report showed hiring has been steady, defying recent worries
of economic weakness after surprisingly weak manufacturing and services surveys
were released earlier this week. Other labor-market measures also look healthy.
The unemployment rate fell to 3.5% in September, a new cycle low, and initial
jobless claims are still subdued.
Wage
growth slowed notably last month, though, hinting that inflationary pressures
could be moderating. As shown in the LPL Chart of the Day, average hourly
earnings growth fell to 2.9% year over year, the slowest pace since July 2018.
5.First
Sign of Peak Jobs? Job Openings Rolling Over.
There was no movement in average hourly
earnings (AHE) relative to the prior month; while the year-over-year growth
rate slowed from 3.2% to 2.9%. The weakness was concentrated in managers’ pay;
while production/non-supervisory wages, although softer for the month, are up
3.5% year-over-year. Wages historically follow corporate earnings, with about a
one-year lag; so the significant deterioration in profits growth this year
suggests further downward pressure on wages. Indeed, although still high in
absolute terms, job openings have rolled over.
In sum
Employment
releases are generally the most influential economic indicators for
economists—and the stock market—as they guide expectations for consumer
spending, consumer confidence, inflation, and income growth. But they have
taken on even greater importance lately for two reasons:
To gauge whether the weakness
in manufacturing is beginning to bleed into the services/consumer segments
of the economy.
The Fed has moved from a
predetermined path for interest rates to a data dependent path, with “full
employment” representing half of the Fed’s dual mandate (the other being
“price stability”).
Welcome to the Working Week: A Look at the State(s) of Employment
Hong Kong
is in the middle of a political crisis. Millions of citizens have been
protesting since June, sparked by an extradition bill that would have allowed
for criminal suspects in Hong Kong to be extradited to mainland China.
Opponents argued that the bill would put Hong Kong citizens at risk of unfair
and violent treatment by Chinese officials. And they worried the bill would
give China greater control over Hong Kong, which China has wanted for a long time.
Vanguard Group, the investment advisor with assets under
management (AUM) in excess of $5 trillion and the largest provider of mutual
funds in the world, is testing a new currency trading platform, reports Bloomberg
citing a person familiar with the matter. Based on blockchain technology, the
peer-to-peer (P2P) platform will enable asset managers to trade currencies with
one another directly, bypassing the need for investment banks.
Business Insider Intelligence
-The FX platform would mark one of the most significant
deployments of blockchain in financial services. Amid considerable hype around
blockchain’s potential to upend existing processes across the financial
services value chain, major players have invested billions on the technology.
Yet, despite those investments, firms have struggled by and large to move their
early experiments to large-scale enterprise operations. If Vanguard can
successfully navigate some of the challenges that have stymied this promise —
from scalability to interoperability — it would act as a litmus test for the
wider industry’s stumbling blockchain ambitions.
-And while success isn’t guaranteed, Vanguard’s pioneering
legacy gives it a considerable advantage. The company has been a major
driver of change within the investment space since it launched in 1975. And
it’s continued this streak in recent years: For instance, while a number of
banks have struggled to take
advantage of the hype around robo advisors, Vanguard’s bucked that trend
significantly. As of this year, the $115 billion AUM it’s amassed via its robo
platform makes it the largest robo advisor, per Robo-Advisor
pro. This ability to leverage emerging technology and trends within the
industry to increase its share of the market makes Vanguard’s efforts to upend
currency trading markets a serious threat to incumbent banks.
8.Blackstone
CEO Stephen Schwarzman: Even billionaires have problems
The chief executive of the world’s largest private equity
company on Trump, bubbles and whether he is on a farewell tour
Danilo Agutoli
By Chris Newlands and Selin Bucak
Even billionaires have problems that money cannot solve. Today,
Stephen Schwarzman’s is traffic.
The chairman, chief
executive and co-founder of Blackstone arrives 15 minutes late for our meeting
at the private equity giant’s London headquarters in Mayfair.
“So many cars on the road,” says
the 72-year-old, whose personal wealth is north of $18bn, according to Forbes.
“It’s a real problem, sorry.”
Schwarzman, who set up Blackstone with Peter Peterson, the
former chairman of now-defunct US bank Lehman Brothers, is in town to promote
his new book What It Takes: Lessons in the Pursuit of Excellence.
One of the lessons cited in
the book — essentially a how-to guide to being rich and successful — is
punctuality. Page 55 reads: “Be on time. Punctuality is the first indicator of
how much thought and preparation you have put into an interview.”
Schwarzman apologises again,
adding: “Have you read the book?”
Lots of people have.
The great and the good have lined up to provide endorsements,
including Jack Welch, the former chief executive of General Electric; Ray
Dalio, the co-chairman of investment company Bridgewater Associates; and
Henry Kissinger, the former US secretary of state.
Even Mark Carney, the
governor of the Bank of England, has taken the time to provide a quote for the
front cover (“This story literally has what it takes”) — a striking move
for the head of an independent British institution, which further illustrates
Schwarzman’s pull.
“Mark told me he has never
ever endorsed a book in his career,” says the American businessman, who hails
from Philadelphia. “I have known him for some time. I sent him the book and he
said: ‘This is terrific, I’m very happy to say what I think.’ You saw what he
wrote. I was very happy about that.”
Schwarzman is used to
rubbing shoulders with the most influential people in politics and finance.
After Donald Trump was elected president in 2016, Schwarzman became head of his
short-lived advisory council, which included Larry Fink, the chief
executive of BlackRock, and Jamie Dimon, the chairman of JPMorgan. The group
was disbanded in 2017 in the wake of the president’s controversial remarks
about a white supremacist rally in Charlottesville, Virginia.
Reports suggest Schwarzman’s
relationship with Trump, who he has known for more than 40 years, has become
frayed. Schwarzman had to distance himself last week from comments made by
the president about the son of former vice-president Joe Biden. Trump is facing
an impeachment inquiry after urging Ukraine to investigate a family member of
the veteran Democrat, who is running for president.
Would Schwarzman like to see
Trump get another term in the White House? “It isn’t relevant what I
think,” he says, sidestepping the question. “We have now, much like you in the
UK, real divided politics. It looks today, on the Democratic side, that we have
Joe Biden and then Elizabeth Warren and Bernie Sanders. And on the Republican
side, there is really only Donald Trump.
“Like any election outcome,
it all depends on who somebody is running against. The Democrats will be running
against Trump, but they as a group are going further and further left. The
further they go left, the more difficult it will be for the Democrats to win.”
We return to safer ground:
the nuts and bolts of the private equity market. Schwarzman and Peterson
launched Blackstone in 1985 following daily breakfasts at New York’s Mayfair
Hotel, where he and the former Lehman Brothers chief executive hashed out
their plan to create a business that would eventually become the biggest and
most influential private equity firm in the world.
In 1987 they raised their
first fund at $800m. Today, Blackstone has $545bn in assets, with its
biggest vehicle, Blackstone Capital Partners VIII, raising an eye-watering
$26bn, making it the largest buyout fund ever.
“When we started the firm we
had $400,000 — $200,000 from me, $200,000 from my partner, Pete, and last
week the company was [valued at] $60bn,” he says.
It raises the question of
whether there is too much money sloshing around the market and whether that
cash can be put to good use. “I’ve been asked that since 1992,” he says. “The
returns have stayed pretty good over the last 25-30 years regardless of peaks
of markets and real collapses.
“When you are managing more
money, the way historically we’ve always dealt with that is you just do bigger
deals. We have never found, despite that question over the decades, that the
amount of capital per se is the issue.
“The nice thing about our
industry is that you don’t have to invest the money for six years. If you think
things are high, you don’t have to play, you can wait. For those of us who have
been doing this for most of our careers, we are used to cycles, it doesn’t
bother us.”
This is not a bubble
compared with 2006/07, he adds. “That was a bubble. I said it was a bubble
then, and it was. Prices now are relatively high, but there is not that frenzy
that happens, because the people who manage the capital have been through the
global financial crisis, and once you’ve lived through that you are not anxious
for a repeat.”
In the book Schwarzman
writes that he does not “feel a day over 38”, the age he was when he launched
Blackstone. It is true that sitting across the table, Schwarzman has a youthful
energy about him for a man born in 1947 but the book, which was two years in
the making, certainly has the feel of a farewell tour.
“No, not at all,” he says
flatly, and we are ushered out of the room ahead of his next meeting.
Envestnet
CEO Jud Bergman could hold court on any of the technological disruptions
affecting financial planners, having co-founded the technological services
giant for the wealth management industry.
But few things could animate him
more than the mere mention of chess.
“I recently had the privilege of
moderating an event panel that included Jud, and I’ll never forget someone
pulling me aside and saying, ‘I’ll bet you anything Jud finds a way to talk
about the game of chess no matter what question you ask him,’” said Riskalyze
CEO Aaron Klein.
“Sure enough, it wasn’t more than
an answer or two into the panel that he started talking about how chess
strategy could teach us something about where financial services was
headed.”
Bergman, 62, and his wife, Mary
Miller-Bergman, 57, were killed in a car collision in San Francisco on Oct. 3,
the company said in a statement. The couple were in a taxi that was hit head-on
by a Volkswagen Cabrio going the wrong way on northbound Highway 101, according
to The Associated Press. The woman driving the other vehicle was intoxicated,
the AP said.
“Today, our entire industry
mourns this devastating loss. Jud’s vision and innovation forever changed the
face of the financial services industry, and will continue to do so for years
to come,” Klein said.
“Looking back, I’m not sure
there’s anyone who has made quite as many chess moves in financial technology
as Jud has, and each move has driven the industry forward and elevated the
profession of financial advice.”
Envestnet’s board appointed Bill
Crager, president of Envestnet and chief executive of Envestnet Wealth
Solutions, as interim chief executive officer. It also appointed Ross Chapin,
the lead independent director of Envestnet’s board, as interim chairman of
Envestnet’s board.
“On behalf of our board of
directors, management team and employees, we extend our deepest sympathies to
Jud and Mary’s family. As Envestnet’s founder, Jud was a remarkable leader whose
vision, brilliance and drive built the foundation for Envestnet’s success.”
Miller was the founder of Hanover
Hill Wealth Advisors in Chicago.
Under Bergman, Envestnet
underwent a remarkable trajectory of growth, from startup in 1999 to a tech
provider able to repeatedly execute multimillion-dollar acquisitions, many
leading brands themselves. The stack of technology Bergman assembled has become
so formidable some predict the company will become a custodian.
Financial planning software firm
MoneyGuidePro was among the latest. Envestnet purchased the Silicon Valley data
aggregator Yodlee in 2015 for $660 million.
At the time, industry leaders
questioned the strategy behind the acquisition, says Joe Duran, CEO of United
Capital. Envestnet stock fell after the announcement, but Bergman was willing
to endure short-term pain to improve his company and the advisors it supports,
Duran says.
“He knew what advisors
needed and was determined to shift the company to support a really complete
suite of services,” he said.
Duran too recalled Bergman’s love
for the game of strategy.
“We both play chess, but never
got the chance to play together,” Duran says. “I suspect he would have beaten
me.”
Industry leaders were stunned by
the news and many sought to convey just how much Bergman did for them on a
personal and professional level.
“I have watched him grow
Envestnet from a startup to one of the leading firms in the industry,” said
Joel Bruckenstein, founder of the Technology Tools for Today conference series.
“Despite his many achievements,
he always had time for others. He was extremely kind to me. He was an industry
visionary and leader. His intellect was impressive as was the breadth of his knowledge.
I will miss him as an industry leader, but more importantly as a friend.”
Orion CEO Eric Clarke expressed a
similar sentiment. “Jud and I had dinner on several occasions and I always had
great respect for the business he built and the way that he built it,” Clarke
says. “Jud had an unprecedented ability to see things that others just didn’t.
“Envestnet is in great hands with
Bill [Crager], but the entire industry will miss Jud terribly,” Clarke says.
Bergman was leaving behind a
legacy of leadership in technology, says Craig Iskowitz, founder and CEO of
fintech consultancy Ezra Group.
“How many different ways can
you say innovator or visionary? How can you explain how one person changed our
industry in ways that we’re just coming to understand? How can you talk about
one CEO who changed how every wealthtech firm approaches the market? There are
no words.”
Many took to Twitter to share
their thoughts.
“This quaint, intimate community
in which we work is never more evident than times like this; when we suffer the
unfortunate loss of one of our own, and this one is profound,” wrote Brian
Hamburger, founder of the Hamburger Law Firm and consulting firm MarketCounsel.
Earlier this year, Bergman
acknowledged in an interview with Financial Planning that
his chess analogies probably needed an update, reflecting on the challenge that
chess champion Gary Kasparov undertook when he played against IBM’s supercomputer
Deep Blue.
With the technological changes
happening on multiple fronts, the best advisors were now engaging in a game of
3-D chess, Bergman said.
“Experts plus machines deliver
better outcomes than experts or machines alone,” he said. “This is a framework
from which advisors, we think, ought to look at how they render advice, how
they manage portfolios and manage client relationships going forward.
“What are
the areas that computer software can do better and what are the areas that the
human expert can do better? This is what Gary Kasparov understood and what the
best advisors understand. There are some things that humans do better than
computers and vice versa.”
Most
of us grew up hearing the mantra “Don’t be a quitter,” and we’ve
internalized it to the point where we feel guilty if we don’t finish a book
that’s boring us to death. Our parents weren’t entirely wrong in saying
that persistence is necessary for success, but
sometimes quitting is the most effective course of action. Whether it’s a
failed project, a thankless job, or a doomed relationship, quitting can be a virtue.
“Quitting is leading too.” –Nelson Mandela
As
it turns out, some of us are really good at knowing when to quit, while others
have a hard time getting “unstuck.” Research from the University of
Rochester found that people are motivated by either “approach goals” or
“avoidance goals.”
Those
who fall into the approach camp are motivated by challenges and don’t waste
time trying to solve problems that simply don’t have a feasible solution. In
other words, they know when to quit.
People
motivated by avoidance goals, however, worry a lot more about failing. They
want to avoid failure at all costs, so they keep plugging away at things, long
after logic suggests it’s time to move on. This is typically a much less
productive way to work.
Knowing
when to quit is a skill that can be learned. If you tend to be stuck on things
long after it’s obvious that what you’re doing isn’t working, you can train
yourself to do better. You just need to practice quitting. Thankfully, life
provides plenty of opportunities to do this. Here are some things we should all
quit doing.
1. Quit doubting yourself. Confidence plays a huge role in
success. Hewlett-Packard conducted an interesting study of the process through
which people applied for promotions at the company. Women, it turned out, only
applied when they met 100 percent of the criteria for the job they wanted,
while men applied when they met 60 percent of the criteria. The researchers
postulated that one of the (many) reasons men dominated the upper echelons of
the company is that they were willing to try for more positions than females
were. Sometimes confidence is all it takes to reach that next level. The trick
is, you have to believe you can. If you doubt yourself, it won’t work. Faking
confidence just doesn’t produce the same results.
2. Quit putting things off. Change is hard. Self-improvement
is hard. Scrounging up the guts to go for what you want is hard, and so is the
work to make it happen. When things are hard, it’s always easier to decide to
tackle them tomorrow. The problem is that tomorrow never comes. Saying you’ll
do it tomorrow is just an excuse, and it means that either you don’t really
want to do it or you want the results without the hard work that comes along
with it.
3. Quit thinking you have no choice. There’s always
a choice. Sure, sometimes it’s a choice between two things that seem equally
bad, but there’s still a choice. Pretending that there isn’t one makes you a
victim who is voluntarily taking on a mantle of helplessness. To play the
victim, you have to give up your power, and you can’t put a price on that. To
succeed at the highest level, you have to quit giving your power away.
4. Quit doing the same thing over and over again and expecting a
different result. Albert Einstein said that insanity is doing the same thing
and expecting a different result. Despite his popularity and cutting insight,
there are a lot of people who seem determined that two plus two will eventually
equal five. The fact is simple: If you keep the same approach, you’ll keep
getting the same results, no matter how much you hope for the opposite. If you
want different results, you need to change your approach, even when it’s
painful to do so.
5. Quit thinking everything is going to work out on its own. It’s tempting
to think that it’s all going to work out in the end, but the truth is that you
have to make it work. This has many implications. Don’t expect your boss to
notice when you’re ready for a promotion, don’t expect your colleague to stop
sloughing work off on you if you’re always willing to do it, and don’t think
that anyone is going to stop walking all over you as long as you allow it.
Everything is not going to magically work out on its own; you
have to be proactive and take responsibility for yourself.
6. Quit saying yes. Every yes you utter is a tradeoff. By
saying yes to one thing, you’re saying no to something else. Saying yes to
staying late at work, for example, might mean saying no to the gym or to time
spent with your family. Research conducted at the University of California, San
Francisco, showed that the more difficulty you have saying no, the more likely
you are to experience stress, burnout, and even depression. Saying no is indeed
a major challenge for many people. No is a powerful word that
you should not be afraid to wield. When it’s time to say no, avoid phrases such
as I don’t think I can or I’m not certain. Saying
no to a new commitment honors your existing commitments and gives you the
opportunity to successfully fulfill them. When you learn to say no, you free
yourself from unnecessary constraints and free up your time and energy for the
important things in life.
Bringing It All Together
There
are dozens of ways we get in the way of achieving our full potential. We doubt
ourselves, we decide that something is just too hard, or we tell ourselves that
we’ll worry about it tomorrow. If you really want to succeed–and I mean really
succeed–stop focusing so much on what you should be doing and, instead,
take a really good look at the things you should quit doing.
What other things should people quit doing? Please share your
thoughts in the comments section, as I learn just as much from you as you do
from me.
Paranoia strikes deep Into your life it will creep It starts when you’re always afraid You step out of line,
the man come and take you away
We better stop, hey, what’s that sound Everybody look what’s going down Stop, hey, what’s that sound Everybody look what’s going down Stop, now, what’s that sound Everybody look what’s going down Stop, children, what’s that sound Everybody look what’s going down
he paranoia around
presidential elections is hitting record levels, we better stop and listen to
what’s going down. We spend a big
portion of our life listening to storytelling.
As kids, parents and teachers tell us stories. As adults the news media is about
storytelling, investing is about storytelling, and nothing paints a better
story than politics. I may be early with
this letter as the presidential election is more than a year away but it’s
possibly shaping up to be the ultimate scary story for investors.
As I write this letter, it is increasingly
looking like a Trump vs. Warren election and a Trump impeachment investigation,
which may be the ultimate binary event for American voters. Never in history has an election been so
important except for every other election in history. Most of my conservative friends thought the
world would end if Obama got elected and most of my liberal friends thought the
world would end if Trump got elected.
If you made either of those investing bets
based on politics, your wallet is probably lighter. The chart below shows that Obama obviously
did a better job with the economy.
Actually this would be a false assumption, as Obama took office when the
S&P was trading at generational low valuations. The single best predictor of future returns
is where valuations are today, the next President will not have the luxury of
beginning his or her term with low valuations.
I write a daily blog, a weekly newsletter,
quarterly letters and occasional white papers, none of which mention politics
as that is not my expertise plus the last thing people need in today’s
connected world is another political pundit.
I am also a registered independent so although I do not worship at a
partisan political church, I do worship at the altar of behavioral investing. Many of you who have read my letters in the
past know the mantra of Fortis is “investing is a psychology game not an IQ
game.” Our emotions are the enemy, and
nothing agitates the emotions like politics.
For a perfect example of knee jerk emotional reaction see the bottom
left of previous image marked “inauguration,” on Obama’s inauguration day the
S&P, Nasdaq and Dow all dropped over 5% in a spontaneous short-term
reaction to the thought that America could indeed become communist.
Every investor I speak with today goes right
to politics and the presidential election; I believe that would make you
normal. All issues are political issues,
so keeping out of politics is an impossible human folly but I think keeping
them out of your investment portfolio is a necessity. As humans, we are full of personal biases, it’s
best not to let them creep into your retirement portfolio because the result
could be permanently toxic.
Why is it so toxic? When
the chips are down, we would rather be wrong and still belong to our tribe.
Let me quote from a Financial Times article that, in my assessment, goes to the core of human
behavior:
“We humans are social creatures. Given a choice between being right on a partisan question (abortion, guns, Brexit, globalisation, climate change) and having mistaken views that our friends and neighbours support, we would rather be wrong and stay in the tribe. … in surveys of views on climate change: college-educated Republicans and Democrats are further apart on the topic than those who are less educated.”
Sticking with your tribe may be fine for
social purposes as we all need a community to achieve a sense of happiness but
leave your tribes behind when it comes to investing. Investing based on political party in office
can get you broke in a hurry as the following chart depicts staying fully
invested versus riding only your tribe’s donkey or elephant.
Inevitably when friends and clients see this
chart, they flat out don’t believe it.
It’s simple math but the political tribe pull is so strong that it seems
for many it’s hard to comprehend the
truth. In very few sports rivalries as
vicious as politics does a 150-year game end in a tie but Republican versus
Democrat stock returns delivered a dead tie from 1853-2015.
Keep in mind, you should definitely care in a
passionate manner about your political beliefs and always participate in the
political process, but you should probably turn off the dashboard of your
investment portfolio when you do it.
Treat investments and politics as church and state, two completely
separate silos of thinking within your household.
Raymond
James surveyed 1,000 US investors with at least $75,000 in the markets in
August. Forty percent said that politics were either “extremely or very
important.” What’s more, 70% said
that news headlines in general influence their investment decisions.
In my
opinion, don’t make changes to your long-term portfolio based off elections but
do get ready for short-term volatility from political storms especially an
impeachment. Thankfully, we don’t have
much history on impeachment hearings, but my friend Bill Stone at Avalon does a
good job of summarizing the stock market returns under Nixon and Clinton
impeachments. It’s tough to flesh out
much from these statistics because the economic cycle was in massively
different stages during these presidencies.
The Nixon 1970’s saw inflation, stagnation and high employment while the
Clinton 1990’s saw low inflation, booming economic growth and full
employment.
Right now, the American investor is obsessed
with a slowdown and recession, every CPA, banker, investment professional and
lawyer I speak with uses the same term “late in the cycle.” Every investor I speak with asks when is the
stock market going to crash, as you can see in the below image, Google searches
on the word recession took a hockey stick spike as we enter possible impeachment
hearings and a heated election season, this obsession could be exacerbated.
Google searches show recession fears have spiked dramatically
since the end of July, when the Federal Reserve cut interest rates for the
first time since the financial crisis.
It would appear this negative obsession heading
into election season is not grounded in the history of the stock markets as the
following images illustrate. As you can
see below, the years prior to a presidential election, and the election year
itself, tend to be good for stocks as candidates make promises for a new
tomorrow.
In
a 1986 dissertation, economist Campbell Harvey identified an economic indicator
that would precede the next seven recessions that indicator is known as “a
yield curve inversion”
Vanguard returns appear to be telling investors to temper
expectations after a great 10 year run and we may see a rotation in leadership
for the next decade.
These probabilistic return assumptions depend on current market
conditions and, as such, may change over time. IMPORTANT: The projections and other information generated by the
Vanguard Capital Markets Model regarding the likelihood of various investment
outcomes are hypothetical in nature, do not reflect actual investment results,
and are not guarantees of future results. Distribution of return outcomes from
the VCMM are derived from 10,000 simulations for each modeled asset class.
Simulations are as of March 31, 2019. Results
from the model may vary with each use and over time.
If you built an investment portfolio based
off politics or geopolitical events, it could permanently sit in cash because
the world is such a scary place. As
pointed out in previous letters, reality is that the S&P 500 is up 15,000%
in the last 70 years surviving an endless amount of doomsday scenarios that
never fully pan out.
Now as we are about to move to the forefront
of our news cycle political theatre is at its highest level, but the end of the
bull market will likely not be about presidential election combat. Bull markets historically end due to higher
inflation, rising interest rates, war, overvaluations or recessions. This bull is likely to fall under traditional
recession with overvaluations but timing it, as always, will be impossible. An inverted yield curve is certainly a first
shot across the bow of this bull but the average time before a recession starts
after inversion is one year out.
If the bull market was to end quickly in the next
couple quarters, it would certainly be a strange set-up with the Fed lowering
interest rates, money pouring into bonds, and positive election cycle
seasonality kicking in.
As hard as it may be, we should separate our
political passions from our investment passions. In my view invest based off your goals not
your political affiliation, if you don’t need to live off your investments in
the near term, embrace any political sparked stock market volatility as an
opportunity to buy lower priced stocks.
At some point America will have a crisis but I expect we will survive and thrive because that’s what Americans do. When the crisis hits just don’t make things worse by getting emotional and making irrational decisions. You don’t have to be super smart, just keep it simple and don’t be foolish. Do you think the next crisis will be worse than the 6 on the following graph? We survived them all.
