Reading the Tea Leaves

We are not big fans of fortune tellers, preferring to stick with what we can observe in the here and now. The here and now tells us that the American economy is getting better slowly and sluggishly, trending upward, something we refer to as the “Plow Horse Economy.”

We do, however, pay attention to what others are saying and if it sounds reasonable, we’ll share it.

Tony Crescenzi of PIMCO has made some points that seem reasonable and in line with our observations. Discussing the market’s reaction to the Fed’s non-move, he says:

“Investment implications and lessons for investors from this year’s tumult in the global financial markets: Rates are likely to stay low for longer … the Federal Reserve has demonstrated that it is likely to take a very gradual and cautious approach to its normalization of interest rates. Policy rates, globally, are likely to stay low through the rest of the decade, supporting equity and credit markets, as well as real assets.

Volatility will result from the unwinding of crisis-era policies…

Economic growth, rather than liquidity, is needed more than ever to bolster asset prices… investors are likely to focus …on economic growth and company cash flows when making investment decisions.”

Of course we think that economic growth, cash flows and profitability should always be the real basis for making investment decisions, and that a change in Federal Reserve policy (especially if it is as gradual as we anticipate) will have very little impact on these fundamental factors.

We received a call from a client the other day asking if we had a secret formula for coping with the recent market decline. We replied our formula was not secret at all. We adhere to our asset allocation strategy, which puts “shock absorbers” on the portfolios during times of market volatility. This means that our objective is to go through market declines with smaller losses than the overall market. While that strategy means that most of the time our portfolios won’t go up as fast or as far as the stock market during good times, it also means that during times when the markets are heading in the wrong direction our portfolios should outperform the stock market and we won’t have as much ground to make up when it begins to recover.

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