Up, Down & Sideways
In past years, the warmer months brought with them a time to turn one’s thoughts to more blissful endeavors. Although childhood may have been many years ago, what lingers is the apparent freedom from care we felt when at last we were done with school. Much has changed since those halcyon days when time hardly seemed to move. Back then, the days went by slowly and the important decisions were few. Now it’s almost as if you don’t know which direction to turn first.
It’s all about communications and the seeming necessity of keeping up to date with what’s going on. Much of the rising flow of developments may have little impact, but even so it’s no longer a time when we can disconnect until September.
From an investment perspective, the challenge is to sort through the rapidly growing mountain of information to isolate the data that is critical and take action where it is needed. On a grand scale, it’s a matter of separating the wheat from the chaff. Hardly a part-time job.
Short term, it seems as if everything has an impact on market prices. It is not at all surprising that as news breaks, the major market averages move sharply in both directions. So far this year, it has been largely a matter of big ups, big downs, and a modest net gain. Far better to take a breath and try to get a handle on where things stand. That’s essentially a return to the basics of investing.
A meaningful period of time in the world of investing is a market cycle of three to five years. However much effort is spent trying to analyze the broad range of available opportunities, it is critical to remember that the value of efforts to understand and make worthwhile portfolio decisions increases as time extends. What happens over weeks, months or even a few years may end up far from what may have been expected. Price movements in the short term are driven primarily by changes in investor psychology.
Geopolitical issues, though troublesome, usually have little to do with the ability of the corporate community to move ahead. Global business issues may be more meaningful, but for the most part they do not move the needle much either. Far more important is the rate of progress from year to year.
Thanks to substantial gains in the number of vaccinations across the country, many people are finally going back to work and companies are beginning to get back on an upward track. Even so, there is still a long way to go.
At the moment, the economy is getting a significant boost from the $1.9 trillion Rescue Plan and it may get further energy from legislation being considered to rebuild the nation’s infrastructure. Still, that is anything but assured.
Where things go from here is another question. There is little doubt that the latest government actions will help continue the recovery in business. In the absence of hefty follow-up funding, however, we could be headed for an extended period of stagnation, much like the span from 2000-2010 in which the investment markets made little progress
That was no surprise. Fast is typically followed by slow and vice-versa. But here we are now in the wake of the decade from 2010-2020, when the Dow Jones Average nearly tripled. As a result of that huge gain, stock valuations are again running toward the upper end of historic levels. That’s an increasing concern.
Those who are comfortable with rich valuations point toward the continuation of unusually low interest rates as well as massive ongoing government stimulus. Those who are more cautious focus on the possibility of leaner valuations if the pace of earnings advances slows and interest rates rise.
Much will be determined by the extent of continuing government stimulus as well as fulfillment of the Fed’s plans to keep interest rates near their current levels. These are the keys to the path for the investment markets over the next few years.
N. Russell Wayne, CFP®
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