Uncontrollable and Controllable
Every day in almost every activity, we can increasingly be the victims of bad things. That is certainly true of our investment activities. Short- and long-term weather, misjudgments of governments, inflation and deflation, as well as other accidents. Essentially, these are beyond our personal control. We can try to anticipate, or at least recognize, these risks and attempt to take some defensive measures.
Controllable risks can be addressed by our own actions. In our investment actions, we should be aware of the various mistakes we could make. Both large and small errors should be avoided, usually by being more patient. In making investment decisions, it is wise to remember what our changing attitudes bring into the decision process. This summer may be a particularly important time to recognize that we may have entered a new phase of the market.
The Game May Have Changed
If you pay attention to what various pundits in the media, political office, or investment circles are saying, we are either in a “bull or bear” market. Quite possibly we are in neither, and have not been in either for some time.
Market cycles don’t follow calendars or the movement of selected indices. Investments don’t move in lockstep with one another either. My particular laboratory is the weekly performance 109 identified mutual fund sectors invested in equity, debt, currencies, commodities, and combinations of largely publicly traded investments.
For a two-year period ended Thursday, 83% of the individual sector averages were negative. The 28 sectors showing gains were led by Japanese funds, Energy and Natural Resource funds, Capital Appreciation funds, Alternative funds, S&P 500 index funds, Short-Term funds, and Money Market funds. (Some stock indices also reached higher price levels in this period.)
Two Down Years Suggests a Change
We have quite possibly entered a different phase of the market and economy. We may have entered a period of stagflation. In the last century, there were two such periods: the Great Depression into early WWII, and the mid-1970s to late 1980s. The latter period killed a popular view of buy and hold forever. In both periods, there were periodic and unsustained rallies of 20% or more for the indices, and much more for individual stocks. Both periods of stagnation were led by government actions attempting to prolong an aging economic expansion. These government actions hurt investor confidence levels and suggested to the public that the economy was better off left alone in returning to equilibrium.
Some investors currently have equity money hiding out in bonds and money market instruments. These investors are itching to bring their equity commitments back up to “normal” level. They view declines as good opportunities – which they occasionally might be, but not often. Investors should not be impatient. If we are in a period of stagflation, averaging in with a small percentage during disparate time periods makes the most sense.
Long Shot
We all gamble on the future and have two choices about predicting the future – extrapolation of the present, or making changes to it. On a day-to-day basis, extrapolation is the most likely. The longer the time period, the more extreme the changes. There can also be periodic Minsky moments of great change.
What happened in Russia this weekend was a dramatic event that will undoubtedly change what happens in Russia for some time. The long shot is what could happen in how the US is governed. This is not a prediction, but an examination of what could happen.
First, we should understand what happened in Russia this weekend. Russia does not have a large, disciplined, and battle-trained army. Consequently, it had to use a number of private armies, the biggest of which was the Wagner Group led by Yevgeniy Prigozhin, who disagreed with the leadership of the regular Russian army. He claimed the Russian army told Vladimir Putin that Ukraine was going to attack Russia with the help of NATO. He also complained that Russian forces were killing Russian sympathizers in Ukraine. The feud got so bad that Putin ordered Prigozhin be arrested. This caused Prigozhin to send his troops to within 120 miles of Moscow, before some settlement was reached and the arrest warrant was dropped. It was arranged for Prigozhin to go to Belarus, a Putin-friendly country. The key point for the US is that Putin now has less confidence in his advisers.
Changes in interest rates will have a relatively small impact on the economy, considering inflation is generally caused by excess demand over supply driving prices higher. What is needed are customers willing to pay higher prices for more attractive goods and services. This, however, is not what Washington is looking to do.
Future Outlook Appears Troubling
- After a trend is recognized, investment groups often change their published outlook for the period ahead.
- It has become popular to expect business conditions to get increasingly more stressed, with interest rates rising and loans becoming more difficult to get.
- China, the second-largest economy, is facing its own debt problems, both at the provincial level and in real estate. The big difference is how they are handling a problem similar to that in the US. They are doing it differently.
Conclusions
Investors need to recognize change while continuing to focus on long-term goals.
Original Post
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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