A horse walks into a bar. The bartender says, “why the long face?”
While the first release of Q1 2016 Gross Domestic Product won’t be released until April 28, the economy appears to have continued to trudge along, although the last three quarters of 2015 looked like a roller coaster cresting a rise, with each quarter slower than the first.
Recession fears are beginning to pop up, and the Atlanta Federal Reserve’s GDPNow forecaster has, since late March begun to post sub-1% forecasts of annual GDP. The latest reading for GDPNow was 0.3%, although the nadir was reached on April 8, when it projected 0.1%. These and other forecasts can be found here on the Atlanta Fed’s website.
Despite low energy prices and a backdrop of apparent continued improvements in the job market, the consumer is in a funk. In an April 14 story on the web, CNBC reported that “most Americans think the economy is getting worse.” The article cites a Gallup survey that showed that “59 percent [of Americans] say the economy is getting worse,” while just 37% think it’s getting better. For some folks, spending money makes one feel better, but with retail sales (excluding food) rolling over, as shown below, that’s not happening.
Improvements in the jobs market can be observed in the following data points, as well as others.
- Job Openings are at the highest level since the series started being tracked in late 2000;
- The Unemployment Rate is at 5%, the lowest we’ve seen in a long time;
- The Quit Rate (folks voluntarily leaving their jobs) is approaching all-time highs; and
- Jobs continue to be added, as reported in the monthly Nonfarm Payrolls report.
And have I mentioned that the two major U.S. stock indexes, the Standard & Poor’s 500 and the Dow Jones Industrial Average, are near all-time highs? The stock market, by these measures, apparently, isn’t worried, although a market technician might say both could be registering potentially-troubling triple tops. Both are on display below.
Plenty of other markets don’t appear quite as sanguine, especially the non-U.S. indexes. What’s more, stocks aren’t exactly cheap in the U.S. The trailing 12-months price to earnings ratio (P/E) on the S & P 500 is 24.18[i]. Other than during the tech bubble years and in the wake of a plummeting denominator after the 2007/8 financial crisis, such valuations have never been higher. Only investment shops in the business of keeping investors invested would argue that stocks are reasonably priced. By this measure, alone, the index appears priced for perfection.
Volatility was the theme for the first quarter, with virtually all equity indexes—certainly those on display below—suffering jaw-dropping declines before recovering in February. Meanwhile, what is perhaps the most unloved asset class—interest rates just have to go up, don’t they?—bonds notched a solid 3% return for the quarter. The Barclays Capital Bond Composite is shown below as a proxy for bonds.
It’s not uncommon to hear that investors sold stocks and bought bonds in a “flight to safety,” and yet the stocks didn’t just disappear, nor were bonds created from thin air. Instead, the stocks were sold to others, and bonds were bought from others. It never hurts to ask oneself, “what does the buyer of what I’m selling know that I don’t?”
During the quarter, the CBOE’s VIX, the so-called Fear Index, derived from options traded on the Chicago Board Options Exchange, reached its highest levels of the last year, save for the August/September 2015 spike. That index has since receded to nearly the lowest levels of the last year, suggesting that investors are more sanguine about the outlook for stocks. That chart is displayed below.
While these charts can make one think that the future was once knowable—surely more than one investor was sure markets would rebound in the quarter (“I just knew it”)—this is an example of hindsight bias, the tendency to think, after an event, that it was knowable, beforehand. In fact, you didn’t know markets would rebound. The future is unknowable, or as Yogi Berra put it—and I paraphrase—it’s tough to make predictions, especially about the future.
It’s this unknowability that leads us to council you to avoid trying to time markets. Instead, stick to a long-term plan and asset allocation; rebalance when things get out of alignment; and if you’re able, whether through periodic contributions to a retirement plan or otherwise, make periodic investments, avoiding big calls on markets that the highest-paid Wall Street strategists and talking heads can’t consistently get right.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
[i] As of April 22. Source: S&P 500 PE Ratio, www.multpl.com