Skip to main content

Sound Advice: October 14, 2020

“I like the dreams of the future better than the history of the past.”

                                                                            Thomas Jefferson

History is a useful, though not infallible, guide to what lies ahead. Invariably, excess in one direction is followed by offsetting movement in the other direction.  Strength is followed by weakness and vice-versa.  Within the universe of investments, there are those that do better than the averages and those that do worse.  When interest rates are low and credit is loose, the stage is set for an acceleration of growth.  When interest rates are climbing and credit gets tighter, the brakes are being applied to economic advances.

Stocks tend to rise when investors expect earnings to rise.  They weaken when the view ahead is less rosy.  Bonds rise when interest rates are dropping. Typically, this takes place when monetary policy eases or when investors’ fears prompt a flight to quality.  As business conditions improve, monetary policy tends to tighten, causing bond prices to fall and bond yields to rise.  As interest rates change, the impact on prices is greatest on bonds with the longest maturities and least on those maturing in the near future.

At all times, the issue is what lies ahead, not what has already happened. More specifically, what investors do today reflects what they expect to happen tomorrow. The reality that follows is often quite different from what was expected. Changes in investor psychology, and their impact on market prices, tend to be far greater than the fluctuations in underlying fundamentals they are supposed to be reflecting. 

A company with an unblemished record of annual advances may be viewed as one with below average risk and above average earnings predictability, but that history will do little to dampen the impact of the speed bumps that loom ahead. Companies with checkered records will generally be accorded leaner valuations, primarily due to the increase in perceived risk.

One of the better examples of the need to look ahead is cyclical companies. Those are companies that regularly move through periods of lean and rich results. Those that produce raw materials such as steel, paper, and fertilizer are of this type. When their profits are in a trough, their shares tend to receive the richest valuations (price-earnings multiples) since investors are aware that profits are atypically low and will rise during the next boom cycle. Conversely, when profits of these companies are peaking, valuations will be low, reflecting the likelihood that a downturn will soon follow.

N. Russell Wayne, CFP®

  

Comments

Post a Comment

Popular posts from this blog

Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections Through the spring months, m ost of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent. We are now in a recession.   The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimo
Post a Comment
Read more

Sound Advice: December 13, 2023

What You Need To Know About Long-Term Care Insurance Long-term care insurance (LTCI) is a type of insurance that helps cover the costs of long-term care services, such as assistance with activities of daily living (ADLs) such as bathing, dressing, and eating. It can also cover the expenses associated with care in a nursing home, assisted living facility or at home by a professional caregiver. Here's what you need to know about long-term care insurance: 1. Not Covered by Health Insurance or Medicare: Long-term care services are generally not covered by health insurance or Medicare, which only provide limited coverage for skilled nursing care and rehabilitative services. Medicaid covers long-term care, but you need to meet strict income and asset requirements. 2. Costs of Long-Term Care: Long-term care can be expensive and can quickly deplete your savings. LTCI helps to cover these costs, providing financial security and ens
Post a Comment
Read more

Sound Advice: December 6, 2023

Some Suggested Financial Adjustments for Retirees Financial adjustments for retirees are crucial to ensure a comfortable and secure retirement. Here are some worthwhile financial adjustments and considerations for retirees: 1.      Create a Budget: Establish a realistic budget based on your retirement income and expenses. Categorize your spending and prioritize essential expenses such as housing, healthcare, and groceries. 2.      Emergency Fund: Maintain an emergency fund to cover unexpected expenses. Aim for at least three to six months' worth of living expenses. 3.      Healthcare Costs: Be sure to fully understand your healthcare coverage and consider supplemental insurance plans to cover gaps in Medicare. Account for potential long-term care expenses as well. 4.      Minimize Debt: Aim to pay off high-interest debt before retiring. This can significantly reduce financial stress and free up more of your retirement income. 5.      Investment Diversification: Div
Post a Comment
Read more