Predictably Unpredictable

Predictably Unpredictable.

David B. Armstrong, CFA Weekly Market Commentary, Weekly Market Commentary Page 18

Share this post!

I had to take a break from blogging for a few weeks due to some heavy travel…yeah, yeah, yeah, I know some of it was self-inflicted with a last minute trip to the Men’s Final Four in Phoenix. It’s not every day that my University of South Carolina Gamecocks have a shot at winning it all at the Big Dance. Of course, the minute I made plans to spend the money and go to see the game live, they were doomed.

Hats off to the South Carolina Women’s team for winning their National Championship. Of course, since I was not present, they won it all.

Last week saw another pronounced move away from equities…the second in a row. It seems that investors were not only focused on escalating risks in Syria, but hot spots like Afghanistan and North Korea also made it into the spotlight. For the week, the S&P 500 Index lost -1.2%, exhibiting the first back-to-back weekly loses since January.

Trees don’t grow to the sky. More on that later.

Stocks Versus Bonds – What’s Up?

First – I have a real conviction about equities versus bonds. While it’s important to disclose that each person has his or her own unique risk tolerances, goals and objectives, I generally prefer equities over bonds.

…especially in this current interest rate environment.

I also believe that despite the last few months, equities should outperform bonds…especially long-term.

U.S. equities have been mostly flat over the last two months on the heels of the post-election rally. Over the same period, bond yields have fallen (increasing bond prices), commodity prices stayed flat and inflation expectations have come down. Sure, a lot of the moves are no more than a reconciliation from an overbought and extended equity market level.

However, I think they may also be reflective of several perceived (and potentially real) risks.

  1. Maybe political optimism was too high.
    1. The Republicans totally whiffed on “repeal and replace Obamacare” and people are now worried about the potential for tax reform and other big-ticket economic items like infrastructure spending.
    2. I’m thinking the recent market activity is a sign of the reduced investor optimism in Trump policies over the upcoming 9 to 12 months.
  2. Expectations for economic growth have declined.
    1. I’m not sure we are going to see any real marked slowdown, BUT, we have had a lot of positive economic surprises rolling in since last October and those may be coming to an end. Case in point – the recent disappointing March jobs report.

Notwithstanding those risks, we believe the long-term outlook for stocks remains positive.

The LONG-TERM outlook…

Here’s why – the U.S. leading economic indicators are positive and global growth seems to be improving with improvements in manufacturing activity and deflationary risks shrinking…leaving us with political risks.

Political risks have definitely been increasing both in the U.S. and around the world, but we are betting that President Trump will ultimately be able to deliver on some of his pro-growth promises. I believe that most constituents and lawmakers want tax reform and infrastructure spending.

Military risks have also been ramping up. Short-term investors have been closely watching developments overseas from Syria to North Korea. True to form, the short-term investors (let’s face it – they are traders, not investors, right?) are ready to hit the buy/sell button in a moment’s notice.

From purely an investment perspective, an unsettled international scene is usually viewed as a distraction for the long-term investor. In fact, according to a report from Charles Schwab and some data from the trusty FactSet terminal, if you go back to 1993, the one-day reaction following U.S. missile strikes saw global stocks fall an average of 0.2%.

Oh…and the five-day reaction also saw a 0.2% drop.

How global events play out in the short-term can be unpredictable, in fact, there is little anyone can do to hedge against it without jeopardizing growth. Luckily, the longer-term market reaction has often followed a predictable pattern.

Which is up. Long-term.

The bottom line is that knee-jerk reactions to short-term developments are rarely profitable and if they are, then it was because a guess was made correctly. It’s rarely skill (my opinion).
Long-term investment plans take volatility into account and keep investors from making knee-jerk reactions.

Be that investor.

That leads me to a final comment on the current level of the equity markets. U.S. equities are not inexpensive by historical terms, I’ll admit that. But we think equities look more attractive than bonds. Bonds also appear expensive, are not yielding much and interest rates seem poised to continue to go up long-term. That will cause bond yields to rise (and prices fall).

Additionally, we think global equity prices will appreciate and maintaining a pro-growth investment portfolio continues to make sense. The downside is that volatility will also likely increase, but as always, we urge investors to ride out near-term market disorders and focus on long-term goals established in financial plans.

Call with questions.

Monument-Wealth-Management-Blog-Subscribe

Important Disclosure Information 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. All indexes referenced are unmanaged and cannot be invested into directly. The economic forecasts set forth may not develop as predicted. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Monument Wealth Management’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

About the Author
David B. Armstrong, CFA

David B. Armstrong, CFA

David B. Armstrong, CFA, is a President and Co-Founder of Monument Wealth Management. Viewed as an industry leader in digital marketing and social media, Dave is the writer of Monument Wealth Management's weekly "Off the Wall" Financial Blog and Market Commentary. His expertise is frequently sought after by journalists and event coordinators. Visit his full biography here.

Share this post!