News or noise?

Time to focus on what matters

The steady diet of headlines pouring out of Washington has been unsettling for many Americans, regardless of where they sit on the political spectrum.  Even Lloyd Blankfein, CEO of Goldman Sachs, jumped into the fray and wrote his first ever tweet criticizing President Donald Trump’s move to withdraw the U.S. from the Paris climate change agreement.  One has to ask whether he is truly interested in the environment, just wants to compete with Trump, or if GS holds a lot of Twitter stock, beaten down lately.

We all know that equity markets (stocks) hate heightened uncertainty. What is happening in Washington is generating an enormous amount of political uncertainty.  Even the word “impeachment” has been bandied about in conventional circles. Some pointed to that “news” to explain the one-day sell-off that caused the DOW to drop 373 points, last month.

But, political as well as international uncertainty has yet to translate into Main Street economic risk. It is here that you and I live.  To assess Main Street economic risk, we look at GDP (both nominal and real), household income, consumption, and nonresidential fixed investment. The standard deviation of those elements is a measure of economic risk.

According to Dr. Woody Brock, economic risk has decreased by well over 80% during the eight decades since 1930. Indeed, there was a spike in the ’00 decade, 2000-09. But so far each of the metrics, with the exception of household income, has shown a decrease in volatility (a standard measurement of risk) this decade. The economy has improved, from a riskiness standpoint.

Many will posit that the fundamentals of the economy, extrapolated from the news, drive the market. If that were the case, one could reasonably expect that the risk of the market would have also declined by more than 80% over those same decades. That simply hasn’t been the case. In that same period there has been only a 20% decline in market volatility (a standard measurement of risk).

Much will be said about the economy improving and that will likely be given as the reason for this or that happening in the market.  In reality, it is very difficult for anyone, including professionals, to make correct investment calls based on the news. That’s because mistakes in interpreting the news are rampant.

Remember when nearly everyone believed that house prices almost always go up and almost never drop. Furthermore, the price paid for a house didn’t really matter.  That led to overshoot of the price and the ultimate bursting of the bubble. We all now know that that belief, so widely held by investors, was a mistake. The news, in my opinion, represents mere noise.  Today, we must concern ourselves with the prevailing stories that may turn out to be wrong.

So what should we be concerned about today?  A possible list includes:

  1. Excessive debt levels. Margin debt is at a record high and student loan debt now exceeds other forms of debt.
  2. Increasing levels of pricing model uncertainty.  Discerning the true value of an investment today is quite different than it was a few years ago before the advent of today’s large, hi-tech companies.

Despite the frequent distractions from the popular press, we are keeping a firm eye on the market fundamentals, as well as the technical signals to navigate through these uncertain times. You might want to turn off the TV and enjoy your weekend and summer.

June 2, 2017

 

Important IRA reminders

I have had a column published in all 107 issues of MD-UPDATE, a magazine that goes to physicians throughout Kentucky.  This month’s column is “Remember the IRA” and contains tips on effective tax management for your IRA.  This should be of particular interest if you have ever made a non-deductible contribution to your IRA or if you make charitable contributions and have an IRA.  Click here for the article. 

Scroll down here and leave a question or comment.  I’m always happy to hear from readers.

 

A bright spot in our future

Two experiences last week renewed my confidence that the future is in good hands.

On Monday, I went over to the University of Kentucky’s Gatton College of Business and Economics at the request of Professor Tom Pope. He asked me to speak to his Personal Financial Planning class. Interestingly, this is the first time the course has been offered at UK and it appears to be wildly successful. This class is comprised of 47 seniors and graduate students studying accounting and finance. Only a couple of the students are expecting to become professional financial planners. Most were taking the class to learn how to plan for themselves and loved ones. I asked about their top financial concerns for their generation. Not too surprising, the first response was debt management (student loans are very real to them) and the second was the viability of retirement plans, especially governmental benefit plans such as Social Security and the state retirement system. By the way, if you haven’t seen the new building at the business school, you should go have lunch in the student lounge and have a look around. What a learning environment!

My second boost of confidence came when I attended the Kentucky Society of CPAs 2017 Spring Awards Banquet honoring Scholarship recipients, successful candidates from the CPA exam, and new Certified Public Accountants.  I went to support our newest hire, Michael (Mike) Wagner, who was recognized with an Award of Excellence for having the high score on one or more sections of the CPA exam. He was also recognized because he successfully completed all of the exam and will qualify for certification upon completion of the experience requirement. I got to meet several of Mike’s friends, some of whom were also award winners and candidates from around the state.

This was a mighty impressive gathering of exceptional talent.  It felt good to be in the room with such brainpower.

Scott

April 30, 2017