The Markets
Recently this has been one of the questions of the day. Almost each day! There are currently many cross currents of opinions on financial markets, especially since they are intertwined with the geo-political landscape at this time. I will attempt to make this a little clearer. However, in many respects regarding the interconnection between financial markets and politics, we are certainly in unchartered waters and conclusions are hard to come by. The takeaway from sorting this all out is of utmost importance.
In my opinion, politics and the geo-political events of the day definitely can have a short-term effect on financial markets. However, in the long run, what matters are present and future earnings of American corporations. This has, of course, been mentioned several times in this newsletter, and I do not believe this time will be any different. Earnings of American corporations seem to be getting better. Could there be a disruption to this trend? Of course. In my opinion, if there was one, it would be from the Federal Reserve raising interest rates at too fast a pace, which seems unlikely at this point. By raising interest rates too quickly corporations would have to pay too much in interest charges, thereby reducing earnings. Again, I don’t think this is likely as the Fed seems to be on top of this. They have signaled many times that the pace of raises will be measured.
As of this writing (March 28) the Dow Jones Industrial Average is in the middle of an eight day losing streak, it’s longest since 2011, although it is up today. We have hit a bit of a rough patch lately that certainly could be linked to politics. The good news is that this recent rough patch has only meant a 2.8% drop in that average. The quick switch from a very decent stock market to one that is much more difficult adds to the confusion and begs the question posed in the headline. There are definitely mixed signals everywhere. Yesterday, (March 27) sure felt like it could be a very rough day based on the collapse of this round of health care reform. However, the markets recovered from a morning down draft and closed near the highs, even though many more stocks were down than up. Talk about mixed signals.
The only conclusion I can draw here is that the strength of this stock market this past couple of months has not simply been due to optimism surrounding the political picture. Instead, it is a clear reflection of an improving economy and earnings outlook that is helping overall to support prices. If the market was basing all its confidence on expected stimulus legislation coming quickly and smoothly, it seems to me it would be reacting worse than it is to the pulling of the health care bill. In other words, this recent pullback to this point, at least, feels like a normal reaction. Unless this changes, long-term investors should not be overly concerned. Keep in mind also the markets may be in the beginning stages of the 17-year up cycle mentioned in previous newsletters.
Again, earnings will win out in the end. There will certainly be some winning sectors of the market and some laggards as well. Hopefully we will be positioned in our models to take more advantage of the former than be subjected to the latter. Hopefully this reasoning helps in getting all these events into proper focus and perspective.
At this time, I would like to present some fun facts to end on a lighter note. Here they are, in no particular order:
- Social Security Trustees announced on 6/22/2016 that the trust fund backing the benefits would be zero in 2035. When the report was first done in 2003, it was projected to be depleted in 2042. (Source: Social Security Trust Report)
- Less than 2% of the banks and savings institutions in the U.S. hold 82% of the deposits. There are a total of 5,913 banks holding $16.8 trillion of deposits. (Source: FDIC)
- China has a target of 6.5% economic growth for 2017. The U.S. has achieved year-over-year growth of at least 6.5% just once in the least 50 years. It was 7.3% in 1984. (Source: National Peoples’ Congress)
- The magic of compound interest. A San Francisco home on the market today for $6.95 million was originally purchased by the current owner’s grandfather for $30,000 in 1926. The current price reflects a 6.2% annual growth rate for the last 90 years. If the house had grown by 10% per year for 90 years, the current list price would be $159 million! (Source : BTN Research)
- 69% of workers retire by age 65, but only 5% of workers retire before age 55. (Source: Census Bureau)
QUOTABLE QUOTES
“The greatest invention of mankind is compound interest” Albert Einstein
See above Fun Fact #4!
“The difference between genius and stupidity is that genius has its limits”
Albert Einstein
Beautiful!
“An investment in knowledge pays the best interest”
Benjamin Franklin
Ben was smart!
That’s it for now. We want you to know we are trying to follow all events closely and doing all we can to be good long-term stewards of your money. As always, feel free to call us as needed. We are always delighted to hear from you. All calls will be returned promptly as you know (usually within 24 hours).
We are eagerly looking forward to working with you in the months and years ahead and thank you for all your referrals to date. Also, as always, should the markets dictate an interim newsletter, we will do so.
OUR PHILOSOPHY
Successful investing is a marathon, not a sprint. Sometimes investing is like watching paint dry, marking time, boring and with not much movement. Sometimes it is chaotic and fear based. Greed and fear are often present. We are long-term investors. We believe four to five years is the appropriate time frame to assess risk and reward. At the end of that time, another four to five year time frame takes place. This keeps happening until one is in the distribution phase of life and needs to live off their assets. Therefore, of course, it is where we are at the end of the race that counts. Although no guarantees can be given, our goal with all our clients is to get to the end of the race in as good a position as possible given their particular life circumstance.
Disclosure Statements
Dow Jones Industrial Average
A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest U.S. companies are performing.
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