Being Boring

By David B. Armstrong, CFA | Jun 11, 2019 | Invest My Wealth, Weekly Market Commentary

Global markets surged higher this week, boosted by falling (read: diving) interest rates as bad economic data led most pundits to predict multiple Fed cuts this year. Everyone has heard the saying, “Bad news is good news,” but that’s usually not the case if the news is actually really bad.

So is it?

Well, it’s true that the global economy is a little sickly-looking…BUT, if the Fed is going to support growth with lower policy rates absent a really major slowdown (and that’s still an “if” no matter what the probabilities project), doesn’t the recent stronger equity performance make sense?

My answer is yes.

But are we going to have a really major slowdown? That’s the variable, because recent equity performance has been a function of those two things – expectation of the Fed lowering rates AND no major slowdown.

What I wrote in my May 29^th blog post remains my current thought:

“For now, I still see MONCON 5.  I see nothing in the model suggesting that we are in a recession nor do I see data that suggest we are within six months of a recession.  It’s true that headwinds have picked up, but a slowing economy is nowhere near the same thing as a negative economy (recession).”

I’m just struggling to find any overwhelming evidence of a recession in the short term, despite the yield curve starting to show some inversions. REMEMBER, lead times to a recession from yield curve inversions are very long and widely dispersed, making them less useful for market timing purposes.  This is why we use our MONCON gauge, and as of now, it’s still at MONCON 5.

In fact, as a human, I’m impacted by the daily news cycle highlighting the problems of the day.  On the surface, they are all singularly important and meaningful in isolation.  The question is whether or not each news item is important or even predictive of what’s to come.

This is why I rely on the MONCON reading.

Things haven’t changed enough to move us to MONCON 4.  Sure, some inputs have changed, but nothing enough to move the needle.  And even when it does, a move to MONCON 4 is not going to prompt any defensive action in portfolios. That won’t happen until MONCON 3.

MONCON has not changed because it’s not watching TV and it’s not subject to emotions…In fact, it never even budged in the 4^th quarter of 2018, as the market tanked around 20%.

Sound boring? Does the lack of action in MONCON get you wondering if it even works?  Does my steady drumbeat of the same old advice over and over again cause fatigue?

That’s the thing about boring, it gets really boring after 10 years.  Fight the urge to do something just to do something…whether it’s trying to do even BETTER than you have been, increasing your risk just to take action, or taking chips off the table because you come to the conclusion that the market has gone on too long and must be getting ready to crash soon.

Personally, I find it hard to get bored with the below.

Investing is not a contest or a game – your benchmark should be progress toward the success of your plan and reaching your goals.

No one talks about that on TV…you know why?

It’s too boring…

Keep looking forward,

Dave

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