You’ve probably heard me say many times before that “Markets are forward looking,” meaning that markets move today based on what investors believe the investment conditions (the economy, demand, interest rates, etc.) will be 6+ months from now. That relationship has not necessarily changed, despite these huge swings that we’re seeing on an almost daily basis of late.
What’s masking that relationship, however, is the introduction of Tweets (yes, Twitter account owner’s 140-character manifestos). We, the investing public, have been conditioned to a Federal Reserve that delivers bland, almost ethereal statements that we attempt to parse to find some hidden meaning. And now we’re faced with daily, even hourly, emphatic Tweets from our President on subjects that can and do have a definite market impact, and we don’t know how to respond. Do you assume the Tweet is true, and thus six months from now the market will look drastically different? Or do you assume it’s false and do nothing? Obviously, based on recent market swings, there are large swaths of money managers who are trading based on erratic Tweets. And trading in large quantities, usually through computer generated algorithms that are NOT necessarily based on market fundamentals, but on technical aspects of the market itself. It’s the equivalent of looking at yourself in a fun house mirror, you recognize the core aspects of yourself, but the image is distorted. Core market and economic fundamentals right now seem distorted by these extraneous factors.
So, lets remove those factors and focus on a few key trends that underlie the current market:
- We are seeing a slowdown in economic growth, not necessarily an END to economic expansion. Yes, the effects of the 2018 economic stimulus will fade, but U.S. growth is expected to stabilize at a level much higher than other regions.
- Trade frictions remain higher than years past, but the markets have largely priced this in over the past year. Despite all the noise about China relations, it is likely Europe that poses the greatest, underpriced threat due in part to Brexit, but also to social unrest (France and Germany for now) and a fragile financial system (Italy, Spain…).
- Short term rates have increased slightly, a small but welcome benefit to those who prefer to hold large amounts of cash, however longer-term rates have not increased in kind, thus creating a relatively flat yield curve. This creates some risk around investment in longer term bonds, and should continue to drive investment in equities.
There’s plenty of activity to focus on without the distortion of Tweets and Algorithms. So before you panic about large intra-day swings or even weekly dips, remember that long term market returns are driven by fundamentals that can not be captured by 140 charters on Twitter.
Keep looking forward!