Maintaining Objectivity

The Arab Spring preceded the European summer which in turn preceded the fed’s latest ‘twist’. The differences between these events are clear but the net result is similar - market volatility. For whatever reason, when we experience a day with volatility & declining markets the mind quickly flashes back to the days, a few years ago, when banks were being bailed-out at a fraction of their former values and Lehman Bros. was suddenly referred to in the past-tense. Sure, there are negatives with regard to the slowing of the US economy however I must objectively point out the positives (and negatives) regarding the current environment:

In the positive camp:

Interest rates are at historically low levels
Implications: low rates allow corporations & individuals to borrow very inexpensively to fund expansions & home purchases or remodeling projects
There is a lot of cash on the ‘side-lines’
Implications: This provides the ability & means to ‘buy on pullbacks’
80% of US corp. earnings for Q2 were above expectations & earnings were up approx 20%
Implications: US corporations are in very good shape
Emerging economies, as an aggregate, have about 2 billion people ‘coming on line’ who want to “live the good life”
Implications: potential for significant new demand for consumer goods & services

In the negative camp:

Unemployment is remaining high
Causes: ‘generous’ & extended unemployment benefits, workers lacking adequate skills & technological improvements usurping employees on production lines
Implications: negativity surrounding consumers’ ability to spend
Uncertainty regarding government policies
Implications: costs associated with Obamacare & other potential legislation weighs heavily on corporate hiring decisions
2008 is still fresh in the minds of investors
Implications: a proclivity to react emotionally

In the ‘for what it is worth’ camp:

The dividend yield on the S&P 500 now exceeds the yield on the 10-year Treasury notes. Sam Stovall, Chief Investment Strategist from Standard & Poor's, cites in his "Stovall's Sector Watch" from The Outlook that this doesn't happen very often. In fact, since 1953, there have only been 20 occurrences when the S&P 500 yielded more than T-Notes. He goes on to say, that the following 12 months, after this occurrence, the S&P 500 rose by an average of +20%.

Bottom line:

No one can predict what will happen. I am operating with a ‘set of tools’ that are unbiased and non-emotional. When the markets are volatile I take a step back and remind myself to be objective – asking "what is?" rather than "what if...?" Said another way, we will adjust to what the market is telling us.



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