Plow Horse Keeps Plodding

On April 14th, 2015, posted in: Economic News by

There are three things going on in the markets right now. First, most all of us know that long term performance smooths out short term volatility. By definition, weekly, monthly, or quarterly data will always be more volatile than the long term trend. Go back to the 1980s or 1990s, when real GDP growth was 4%, a “slow” quarter was 2%. But today, our Plow Horse economy has been expanding at about 2.5% annually instead of 4%. This means a “slow” quarter can show zero growth, or even less. This is not abnormal volatility for a slow go economy and could easily be mistaken for real economic trouble. But is it, really?

Second, too many analysts and investors believe the current recovery and bull market are “sugar highs.” This is a mistake. They believe the government’s easy money and spending policies are what lifted stock prices. They believe all growth is artificial and everyone knows a sugar high, by definition, is temporary. All markets are subject to regression to the mean. So when the winter weather negatively impacts the economy, like it has the last two years, the rebound will likely look bigger than the trend.

Third, investors are still suffering from what might be termed, Post-Traumatic Stress Disorder as a result of the Panic ‘08. I wonder how many investors remember the Panic of 1907? Not many, I am guessing. But the Panic of ‘08 is still upper most on the minds of many and they are like abused spouses, every time something happens reminds them markets are random. It makes the world seem less stable. Every piece of bad news is a precursor of another “black swan” event… even though “black swans” are very rare, by definition.

All this produces a feeling of “Dread.” This is the perfect word for how many investors view the markets, the political environment and the economy. Some experience it daily, ever since the bottom in March 2009. Some experience it every time they see the stock market fall. Remember, markets go UP and they go DOWN.

If the economic data is weak, dread can reinforce an emotional response. If there is a change in fiscal or monetary policy, or the market becomes volatile, dread can gain a foothold and cause dysfunctional reactions. The truth is, dread has encompassed the markets a couple of times a year every year for the last six years.

When the employment figures on September 2, 2011 were announced as zero, dread consumed investors. Real GDP in the first quarter of 2014 was negative and caused waves of dread! The concern about interest rate hikes and the reduction of government bond purchases all evoke dread.

So, here we go again, dread is consuming the media and the investor exuberance. But this time the bar is substantially lower than the past. But it is causing dread. We saw payroll employment increase by 126,000 in March and some analysts predicted reduced real GDP estimates for first quarter to less than 1%. Dread became double dread in some quarters!

It seems the Fed is positioning the economy for a rate hike later this year. Couple this with a series of temporary, or at least one-time, events affecting economic data – weather, the drop in oil prices and union slowdown at West Coast ports, you have dread.

It was reported this February was the coldest since 1979. The cold and the sustained decline in oil prices has undermined investment growth in drilling activity. The work slowdown at West Coast ports affected trade data, production schedules, and retail activity. These are disruptive, but are they long term predictors of the trend? Will they have long term impact on the course of the economy? Remember, this is still a Plow Horse economy, plodding along, but with great strength and resolve.  The Fed knows these problems are temporary. So do most analysts. Yet, because these factors have brought growth close to zero, and because the economy is already growing slowly, it builds fear and dread.

How did we get into a situation where public faith is in the government? If the US really wants to grow faster, it must start having faith in markets and entrepreneurship. Government spending and redistribution of wealth undermine growth and confidence in the greatest economic engine in history. If you know horse racing, you know they handicap the horses by weighting down the jockey. The heavier the jockey, the slower the horse, and the slower the horse, the more dissatisfied the bettors. The same is true of go-go investors. They want a lot of action.

However, despite the socialistic mindset of the ruling class, it does not change the fact new technology is raising productivity, and increasing returns on investment in the private sector. The Great Divide (what some call income inequality) is caused by this dichotomy. The free market economy is booming, while the government-funded side is suffering. But many of the citizens have chosen to make less money so they don’t have to work. This choice looks like there is great disparity in opportunity. But instead, it is great dysfunctionality in work ethic.

In the final analysis, investors don’t invest as one. They do not invest in the aggregate. Instead, they invest in the companies that are experiencing high productivity and high profits. As a result, this current wave of dread is just like the last wave of dread and fear. It is all temporary. Markets go up and markets go down. Don’t dread the Plow Horse. It the economy is healthy and moving forward despite all the efforts to subvert it.

Q1 Dimensional Equity PerformanceHere are two charts from Dimensional. In other newsletters and reports, we have discussed 2014 was a large cap year. Look at the returns posted by the various asset classes in ’14. You can see this chart that large companies provided most of the market return in 2014. The international market was hard hit by the Greece issues and other geopolitical events.

We also saw the S&P 500 gain 13.69% in 2014, out preforming most other market indices. But was that the full story?
As we look at the Dimensional returns for first quarter 2015, the markets have come back into stability again. It is easy to see from this chart the general performance of all the asset classes.

Q1 Dimensional Equity Performance (2)Again, it is important to remember, when you invest in markets, it is not a straight line up. Markets do go up and down depending on many factors. But over the long run, they have always gone up. There is nothing to think that will change any time in the foreseeable future.

So what is the best way to invest? We still believe, as we have for 25 years Dimensional offers the most cost effective way to invest in the stock market. The research and data continues to show that the FOUR Nobel Prize winning lessons are more reliable and predictable than alternative strategies that have no basis in history or fact.

We are proud of our association with Dimensional. We continue to believe Dimensional will deliver a high standard of value over the ups and downs of the markets. We hope you do too.

 

 

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. All investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.
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