by Franklin J. Parker, CFA
The Summary
- This week gives us some insights on the financial health of US families. Today we see figures for home prices, tomorrow we see the number of job openings (11.4 million openings are expected), weekly initial jobless claims post on Thursday, and on Friday we see average earnings and the headline unemployment number, which is expected to tick slightly down to 3.5%. All in all, this is an important week for data.
- Last week’s rally brought US stocks higher, led by downtrodden tech shares. The rally was positive from a technical perspective, showing strength after several weeks of weakness. However, volume has been lower indicating there may not be as much momentum behind the move as there otherwise would be.
- Given that I see a low probability of recession this year, it is my view that markets have either bottomed or are very close to doing so. Stocks rallied strongly after touching the 20% down mark. Whether or not those buyers stick around is an open question, of course, but downswings in excess of 20% outside of recessions are very rare, historically. That said, if the S&P 500 starts to break below the 3800 level, prices may struggle to find support. As I have said for a while now, flexibility and adaptability are key in this environment.
The Details
Imagine for a minute that you are in an airplane when the engine catches fire. The panic is palpable. The feeling of helplessness, the angst over your immediate future…
While I am not a pilot, I have always imagined that the pilot must have the same panic as everyone else on the airplane in that scenario. The pilot, however, has one distinct advantage over the passengers: she has a checklist to run in that kind of emergency. While she may feel the angst, she does not let it drive her decision-making. Rather, she turns to a pre-thought-out series of steps that will ensure the situation ends as well as it can given that an engine is on fire.
Which illustrates the importance of a cohesive investment strategy, and the discipline to follow it. A cohesive strategy is that checklist that tells you what to do in any market scenario. Just like the pilot, we might feel considerable angst, but we must keep ourselves disciplined to follow the pre-thought-out series of steps that will ensure the best outcome, given the market scenario.
Without that checklist, that cohesive strategy, we are left to cast about wondering what to do, listening to any and all thoughts on the matter. Can you imagine our pilot having the passengers debate how to handle an engine fire!?
I find it helpful, from time to time, to remind ourselves of the basics. A cohesive investment strategy must be a central feature to any interaction with markets. Without it, we are left to cast about during the inevitable times of market turbulence. And that kind of behavior can quickly threaten our future goals!
Chart of the Week
Valuations, at least as measured by price-to-earnings ratios, have come down quite a bit over the past six months or so. This has been a global trend in keeping with the coordination of central banks to tighten the money supply, as this week’s chart demonstrates. US markets still command a premium, though even that premium has contracted a bit. A return to pre-2015 valuations would be a welcome sight for investors struggling to deploy cash at valuations sitting around multi-decade highs.
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