When Only One Thing Matters

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In my head is the vague memory of some political talking head who predicted economic ruin under Obama. He had once worked for the US Government in the 80s and had predicted a recession using only three economic indicators. His call that a recession was imminent led to much derision and he was ultimately let go from his job, left presumably to wander the earth seeking out a second life as political commentator making outlandish claims. I forget his name and, so far, Google hasn’t been much help.

I bring this half-formed memory up because we live in a world that seems focused on ONE BIG THING. The ONE BIG THING is so big that it clouds out the wider picture, limiting conversation and making it hard to plan for the future. That ONE BIG THING is Trump’s trade war.

I get all kinds of financial reports sent to me, some better than others, and lately they’ve all started to share a common thread. In short, while they highlight the relative strength of the US markets, the softening of some global markets, and changes in monetary policy from various central banks they all conclude with the same caveat. That the trade war seems to matter more and things could get better or worse based on what actions Trump and Xi Jinping take in the immediate future.

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Now, I have a history of criticizing economists for making predictions that are rosier than they should be, that predictions tend towards being little more than guesses and that smart investors should be mindful of risks that they can’t afford. I think this situation is no different, and it is concerning how much one issue has become the “x-factor” in reading the markets, at the expense of literally everything else.

What this should mean for investors is two-fold. That analysts are increasingly making more useless predictions since “the x-factor” leaves analysts shrugging their shoulders, admitting that they can’t properly predict what’s coming because a tweet from the president could derail their models. The second is that as ONE BIG THING dominates the discussion investors increasingly feel threatened by it and myopic about it.

This may seem obvious, but being a smart investor is about distance and strategy. The more focused we become about a problem the more we can’t see anything but that problem. In the case of the trade war the conversation is increasingly one that dominates all conversation. And while the trade war represents a serious issue on the global stage, so too does Brexit, as does India’s occupation of Kashmir (more on that another day) , the imminent crackdown by the Chinese on Hong Kong (more on that another day), the declining number of liberal democracies and the fraying of the Liberal International order.

This may not feel like I’m painting a better picture here, but my point is that things are always going wrong. They are never not going wrong and that had we waited until there were only proverbial sunny days for our investing picnic, we’d never get out the door. What this means is not that you should ignore or be blasé about the various crises afflicting the world, but that they should be put into a better historical context: things are going wrong because things are always going wrong. If investing is a picnic, you shouldn’t ignore the rain, but bring an umbrella.

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The trade war represents an issue that people can easily grasp and is close to home. Trump’s own brand of semi-authoritarian populism controls news cycles and demands attention. Its hard to “look away”. It demands our attention, and demands we respond in a dynamic way. But its dominance makes people feel that we are on the cusp of another great crash. The potential for things to be wiped out, for savings to be obliterated, for Trump to be the worst possible version of what he is. And so I caution readers and investors that as much as we find Trump’s antics unsettling and worrying, we should not let his brash twitter feuds panic us nor guide us. He is but one of many issues swirling around and its incumbent on us to look at the big picture and act accordingly. That we live in a complex world, that things are frequently going wrong and the most successful strategy is one that resists letting ONE BIG THING decide our actions. Don’t be like my half-remembered man, myopic and predicting gloom.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

America Is In Great Shape; Be Afraid!

markets_1980043cAll year people have been expecting a correction in the US Markets. For most of the year I have listened to portfolio managers discuss their “concern” about the high valuations of American companies. I have also listened to them point out that America remains the strongest economy and the most likely to see significant growth in the coming year.

Flash forward to late-September, early October and the markets have finally had their corrections. At the bottom every market was negative, including the TSX which had given up all of its YTD high of 15%. That was the bottom. The recovery was swift, money flowed back into the markets, and hedge fund managers managed to make a mockery of some otherwise nervous DIY investors. Now the markets look strong again, with the S&P 500 reaching new highs. Nobody is happy.

All of this comes on the news that US GDP was up 3.9% in the third quarter, a full .5% above analyst expectations (that sounds small, but it’s worth billions) while energy prices continue to decline, manufacturing is highly competitive and US consumers look poised for a significant Christmas bonanza. So what’s wrong with this picture? Why are both the Globe and Mail and the Financial Times worried about the US stock market?

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The answer is a combination of fear, data, and the insatiable need for stories to populate the media everyday. First is the fear. Stocks are at all time highs. The problem is that “all time high” isn’t some automatic death sentence for a stock market. The stock market always hits new highs all the time, and a by-product of that is that corrections can really only happen after a high is reached. Look at the history of the S&P 500 since 1960:

Screen Shot 2014-11-26 at 11.02.50 AMAs you can probably tell, there are a lot of “new highs” that had occurred over the last 40 years, but each new high did not automatically translate into some automatic correction. There were legitimate reasons why the economy could continue to grow, and in the process make those companies in the stock market more valuable. That isn’t to say that the stock market can’t be “frothy” or that their aren’t problems in the stock market today. It merely means that setting a new market high isn’t proof of an impending collapse.

The second issue is data. We live in an age of Big Data. Data is everywhere and there is so much it can be hard to separate the useful data from the useless. Some of the data is concrete, but much of it takes time to understand or even become clear. The first analysis of the higher than expected GDP numbers seemed great (more economy, Yay!) but upon closer inspection, there are reasons to be cautious. While the GDP was higher than expected, it was largely due to growth in government spending, not consumer spending. In fact consumer spending was lower quarter over quarter. In addition there are a number of concerns about how corporations are spending their profits and whether that is sustainable. Many of these concerns, when taken in context, seem to be the same from earlier in the year.

The third factor is the insatiable need to write something. Content is king in the news world and providing insight (read: opinion) means that you must constantly produce new stories to publish. That means that there is a need to be constantly suggesting that things are about to go wrong (or more wrong than they already have) to create a compelling story. It isn’t that these stories are wrong, just that constantly saying the stock market is going to go down isn’t insightful, since at some point we can expect the stock market to correct for one of a number of reasons.

So is America frothy? Are we poised an some kind of financial collapse? I don’t know, and nobody else does either. We are no more likely to correctly know when the market might correct again than we are to guess the future price of gas. The best response is to diversify, and remember some core elements of investing. Buy low and sell high. With that in mind sturdy investors should probably start giving the beat-up and maligned Europe a second look…