There is often a sense of calm before the storm. This calmness we have enjoyed in the financial markets, in fact seems to be at odds with actions predicted by the Trump administration, which seems to be in chaos with a growing uncertainty surrounding the prospects for his populist agenda. The President said he might exit the North American Free Trade Agreement, build a Mexican wall, overhaul the health care sector, cut taxes and increase infrastructure spending. At the same time the tensions with North Korea and his comments charging “fire and fury” are not reassuring for investors.
It would be reasonable to think that this might lead to a higher level of market volatility. Well, that has not been the case. In fact, the S&P 500 index has fluctuated very little on a daily basis, and it has been almost a year since it has declined more than 3% before bouncing back. The gradual upward trend and historically low market volatility has disguised some wider swings in prices of individual stocks and sectors. The U.S. economy has shown stronger growth over the past year, but it may not live up to rising expectations. In any case we do not believe investors should necessarily view the lack of daily volatility in the indices as a positive market factor. And a rise in volatility will not necessarily be a negative factor.
Over the years most investors say they want to conserve and grow their portfolio and don’t want to take on a lot of risk. Right investing begins with right thinking. Some may be tempted to go along with the latest popular trend. Most often it is to buy the securities or indexes that have been showing the biggest gains and become a trend follower. The downside of this approach is that it usually ends up lacking fundamental support without a margin of safety. Being a trend follower works until it doesn’t. That’s not investing, it’s speculating and that might bring about a permanent loss of capital.
The wisdom of crowds is overrated. Going along with the crowd may give a nice comfortable feeling for a time, but the consensus reflects what the majority are thinking which is usually already reflected in the market. When everyone thinks alike, something else is probably going to happen. Somerset Maugham wisely said, “If fifty million people say something foolish, it is still foolish”.
There is a strong tendency for investors to seek out data that reinforces their preconceptions. This so-called confirmation bias makes it difficult to keep an open mind to contrary views that are outside consensus expectations. If you want a different result, you have to think differently, invest differently, and follow a disciplined approach to investing and risk.
Investors who follow the thinking of a professional advisor may be able to minimize the risk of buyer’s remorse by critically evaluating the news and markets. At Whitnell, our investment process is centered on three disciplines: (1) Perspective to invest in a way that is consistent with your objectives, (2) Conviction to arrive at an objective decision amidst conflicting evidence, and (3) Have a Margin of Safety, the discipline of investing for less than calculated long-term investment value.
With this three-fold approach investors can deal with market uncertainties and avoid potentially costly errors. The market exists to afford the investor the convenience of making transactions, but not to drive investment decisions. The focus should not be on whatever is going on in the market, but the analysis of the probable future outcomes. When the metrics of quality, earnings sustainability and valuation are positively aligned, that spells opportunity.
The Fed is slowly reducing monetary stimulus and central banks around the world will be following suit in due time. Interest rates, while still extremely low, are likely to move higher over the next several years, as global economic growth has improved. This will have a negative impact on some of the stock, bond, and real estate investments that are selling at high valuations, so caution is required. It is also important to avoid the temptation to assume that the current trends in the markets will persist.
Equity investments in operating companies continue to provide investors with the opportunity to receive attractive returns on investment over time if the companies do well, providing, of course, that the investor does not pay an excessive price for the investment. Volatility in market prices or the lack of it can make investors nervous, but stock prices over time tend to move around expected earnings and intrinsic value.
At Whitnell we believe that the entrepreneurial spirit is still alive, not only in America, but throughout the world. Over time, including well-selected equities of different businesses at home and abroad in diversified portfolios should deliver profitable results.
Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co. No part of this publication may be reproduced in any form or referred to in any other publication, without express written permission. Whitnell & Co. is an SEC Registered Investment Adviser.