"Hey Marty, what's happening with the market? I can't believe it. Is it Obama? Is it the Republicans? I can't believe what I'm seeing on the television. So at a free moment you can refresh my memory. When I see all the pluses, that's quite a feat! You gotta have an answer for this."
The above was the voicemail message I received this morning from a good friend/client.
Now Tom is not your everyday consumer. He stays very much abreast of the world's goings on and has a healthy perspective on the whats and whys of markets and of the economy. Meaning, he knows that no one can truly know the whats and whys behind the actions of billions of individuals pursuing their individual objectives on any given day. His "Is it Obama? Is it the Republicans?" questions would thus be rhetorical. But for most, I'm afraid, that would too-accurately reflect their instincts. It has to be policy---public policy has to be responsible for the recent positive tone in stock prices. And make no mistake, both sides of the political aisle are drafting their official acceptance speeches as they assign grossly-undeserved credit to themselves.
If you watch Maria Bartiromo on CNBC, she and virtually every analyst she interviews assigns credit to the Fed. Stocks love easy money, or so it seems. And as long as the Fed continues to buy down interest rates, stocks have very little competition. The economy shrank last quarter and the market barely blinked. Why? Because that means QE (the Fed printing money and buying treasuries and mortgage-backed securities) ain't going nowhere. The consensus has it, for the moment, that sequestration (mandated spending cuts) will happen. Economists predict that'll take three-fourths of a percent from GDP in 2013. Therefore, again, QE ain't going nowhere!
I predicted back in '08 that the incoming president would be a shoe-in two-termer. I was, naively, anticipating that the economy---then in the dumper---would, by 2012, be cycling back in robust fashion, regardless of who occupied the Oval Office. Incumbents don't lose when the economy's humming along. And while I was right on the two-term part, I was way wrong in terms of the reason---"robust" would not describe this economy. But you know why Native American rain dances worked 100% of the time, don't you? Because they never stopped dancing until it started raining. Or as Brian Tracy once said "If you want to be known as a great economist in America, predict growth. If you predict growth you'll be right 70% of the time. And if you're wrong temporarily, you'll be right pretty soon."
Yes, I believe America will experience robust growth at some point in the future. Now whether we're at the cusp of a great expansion, or teetering on a cliff---or somewhere in between---remains to be seen. As for why stock prices have been on the rise of late, I say nay to those who credit either party, or the Fed. Higher taxes, tighter regs, an opaque national health care plan and money-printing do not a sustainable bull market make. Simply put, stock prices are up because buy orders have been placed and sellers, for whatever reasons, don't think yesterday's prices accurately reflect the value of the stocks they own(ed).
Yeah, I know, that last sentence is an utter copout for an experienced investment advisor. So here's what I'm telling Tom when I call him back:
Stock prices, by conventional valuation metrics, are, historically-speaking, attractive. For five years equity mutual funds have seen net-redemptions while bond funds have ballooned. Once-panicky 401(k) account holders forever chase returns, and they're quarterly statements are telling them that they're missing the boat---so they're jumping aboard. Hedge fund managers have been abysmal investors of late, and they have to catch up if they hope to catch new assets. Consumer confidence is on the rise, the housing market's showing some life, durable goods orders are up, retail sales are up and 75% of companies have reported earnings better than expected. China looks stabler and European yields have settled down. Corporations are sitting on $3 trillion in cash, and so on.
Now it would be utterly irresponsible for an experienced investment advisor not to add the following:
BUT then there's the debt ceiling, the sequester, the looming credit downgrade, and the threat of yet another tax hike. There's the Middle East, Europe's still deep in the woods and who can trust China's numbers? The consumer's fickle, hedge funds can turn on a dime, housing could stall if interest rates spike and inflation could rear its head. Then there's earthquakes, inclement weather and a bazillion other things I can think of---and a bazillion other things I can't.
The bottom line; there's an incalculable number of things that impact the global economy---and the markets. The one thing you can count on, however, is cyclicality. Although, ironically, the thing the mainstream media loves to credit for the present trend---ultra-easy monetary policy---can indeed mute or exacerbate movements within the cycle, as can fiscal policy.
So how does the long-term investor succeed in a world influenced by bazillions of unknowns? That, believe it or not, I can narrow down to what we may call the three keys to successful long-term investing; diversification, diversification and diversification...