Special to the Globe and Mail
by Tom Bradley
“The world economies are uncertain.
The world politics are confusing.
Large debts exist – countries and consumers.
High unemployment exists in many parts of the world.
Can the recent surge in the equity market be explained?”
A client sent me this note last week. I thought it captured today’s investor concerns very well. As to his question, here is my response. As you’ll see, I come at it from two very different angles.
In the shadows
There’s plenty of scary news out there and the political uncertainty is indeed off the scale. The media’s spotlight is clearly focused on the negative, which isn’t unusual, although it feels more intense right now.
But there are positive things going on too. Behind the headlines in the shadows are indicators that Europe is finding its legs and starting to grow, despite Brexit and political uncertainty. Obscured from sight is the fact that profit growth in Japan is topping the charts and the expansion of the middle class in the emerging economies is unrelenting. And despite what Donald Trump says, the U.S. economy is doing just fine, thank you.
Housing is strong, employment is growing and the greenback is on a roll. There are other positives, too. Conventional energy is cheap and the use of renewables is growing.
The impact of technology on how businesses and governments are run is accelerating. And stock dividends look pretty good in the context of near-zero interest rates.
The point is, the backdrop for the market is not all negative. It’s a mixed bag.
The manager of Steadyhand’s Income Fund – Connor, Clark & Lunn Investment Management – summed it up well in their December Outlook. “It’s important to note that these changes on the political front are happening while the global economy may be in the midst of a synchronized upturn.”
Not a surprise
The more important point, however, is that we should never be surprised by the market. In the short term, it’s impossible to predict where it’s going, or why. We all desperately want a nice, neat explanation, a cause for the effect, but it’s not there. There are too many factors at play – interest rates, currencies, energy prices, central bank interventions, debt levels, demographics, politics, technology, incentives, valuations and of course, investor sentiment.
What’s happening now, with the market seemingly out of sync with reality, happens all the time. It’s just that the drama and emotion around Mr. Trump’s election has made Mr. Market’s ambiguities more visible.
Howard Marks, chairman of Oaktree Capital, put it this way: “While people search the market’s behaviour for logic, there really doesn’t have to be any ... sometimes the market interprets everything positively, and sometimes it interprets everything negatively.”
Embrace it. Don’t chase it.
I don’t spend a minute trying to figure out why the market is doing what it’s doing. I do, however, provide clients with medium-term projections for asset class returns. Nothing too precise, just a range of possible outcomes that help set expectations for the next five years.
For stocks, we’ve been using 5 per cent to 7 per cent per annum, but given the market’s strength, this range may come down a notch in the New Year. In my opinion, stocks are still the best available asset class, but it’s not a time to mortgage the farm and load up the truck.
My final piece of advice to our confused client: Don’t read too much into the market’s mood swings. Instead, take advantage of these times. In the current context, that may mean using the strength to reposition your portfolio, possibly selling or trimming positions you’re uncomfortable with. It may also include some buying because the rise hasn’t been universal. There are many good stocks that have been left behind.
If you’re a disciplined investor who has a plan and a good sense of value, a temperamental market is your friend and should be embraced.