Truth is Stranger than Fiction
Many profess that truth is stranger than fiction and today it seems applicable to many aspects of society. From politics and finance to the tabloids, the stories of the day are more sensational and farfetched than ever. And in truth, we are learning that many of these stories are either completely false or unverifiable. These communiqués are working their way into the consciousness of society through social and in some cases, mainstream media. Often these fictitious stories are debunked, but only after the damage has been done.
Ask someone charged with a crime, who had their charges dropped after better information became available, if their reputation was tarnished.
Herd mentality weighs heavily when individuals make decisions about their money. Behavioral finance is a field that has developed around this phenomenon and its tenets extend well beyond money. It can be applied to explain the poor decisions individuals make in many aspects of life in an attempt to preserve their own well-being.
The root causes for poor decisions are the lack of perfect information and abundance of personal biases. Predicting future events based on facts should be easier today since enormous amounts of data are now available. However, data must be analyzed for relevance and context. It seems the outcome of professional sporting events should be near to a sure thing with the statistics that are easily known about athletes and teams, and yet, every week there are upsets. Life, like investing, is not as predictable as we might like.
Over time though, statistics win out. And when investing in well-financed, diligently run businesses at reasonable prices, desired results are attainable. The key is paying an attractive price.
In spite of political uncertainty surrounding economies around the world and the recent 'melt-up' of the U.S. stock market post-election, we continue to foresee opportunities in equities. We believe that the U.S. will continue to lead economically across the world to create more, not less, wealth. This should lead to greater valuations for risk assets like stocks and high-yield bonds. Hard assets such as commodities and real estate will also benefit as coordinated efforts of central banks around the world continue to fight deflation. That said, we do not foresee any significant inflation evolving in developed markets.
Our reading of major economic statistics help support this view. Gross Domestic Product, unemployment trends, housing and industrial production, to name a few, paint an encouraging picture. Consumer confidence is also moving in the right direction and this helps create a positive feedback loop. As with Newton's first law of physics (a body in motion stays in motion until acted upon by an outside force), we will likely continue to grind to new highs until an unexpected event alters the market's course. Valuations, while not inexpensive by historical standards fairly reflect today's investment climate in the U.S. The better opportunity likely remains outside the U.S. where foreign companies trade at historically wide valuation discounts.
The U.S. economy continues to recover from the Great Recession and the Federal Reserve has successfully backed the economy with unprecedented measures. Starting three years ago, the Fed began removing support and the process continues in a slow and measured fashion. All along, major markets continue to function well and many have hit all-time highs. Many foreign economies, such as those in Western Europe, are not as far along in the process, but as in the past, they will follow the U.S. and get to a better place in time.
What could the catalyst be that alters the economy and market direction? Rising interest rates, trade sanctions and major budget deficits are just a few items that could cause the next slow down and bring a temporary halt to our growing economy. However, these concerns are nothing new and the catalyst to the next downturn will likely be as unexpected to investors as ones in the past.
The best defense to uncertainty in any endeavor is knowledge and confidence. Let us know how we can help in both areas. We look forward to continuing the conversation.
We would like to take a moment to recognize Ben Frey for earning his Certified Treasury Professional designation.
Save the date for an EPIQ open house at our new office.
We are thrilled with our new space and look forward to sharing it with you.
Thursday, April 20th, 2017 – 4:30pm – 7:00pm
2919 Knox Avenue South, Suite 200 | Minneapolis, MN 55408
More details as the date approaches.
Wishing you a happy, healthy and prosperous 2017!