Something To Fear?

Have you seen this ad streamed at you: “Wall Street legend warns ‘A strange day is coming.” If you click on it, you see that according to Wall Street legend Marc Chaikin, “life is about to get even stranger, and it could have a sizable impact on your wealth.”

To find out what he is talking about, you have to click on a link that brings you to another web site, where services are offered, free of charge. Except that they are not free of charge. Maybe you have been pulled into something similar to this. It is called “click bait.”

Click bait isn’t needed for popular products and services, but it is an essential tool for those using fear to sell something you might not ordinarily buy. And don’t we all harbor some, or maybe a lot of fear?

Fear is an unpleasant emotion.

It is not unusual for clients to call us because of their fear. Often, clients will open a conversation with something like “do you think the market is going to crash like everyone says it is?” They need not have fallen for click bait, often all it takes is listening to the evening news. Bad news gets more attention than good news.

There is always something to worry about. We can make a list – a Russian invasion of Ukraine; the Federal Reserve about to raise interest rates; incompetent government leaders; China’s property debt imploding; INFLATION.

We have never known a time where we could not put together such a list. But that doesn’t mean you have to give into your fears and sell your stocks. We pretty much never recommend that because stocks go up much more often than they go down, and nobody knows which is coming next. And once you sell, it is very difficult to determine when to get back in. Market timing doesn’t work very often and we don’t recommend it.

We would like to address some of today’s fears because the market has started out the year badly, and that’s when most of us start to worry. We’ll dismiss a Russian invasion as a reason to sell stocks because when the Russians annexed Crimea, markets barely shrugged, even with bear market predictions spewing forth. As to the Federal Reserve, we find that the Federal Reserve is more likely responding to the economy and the market than the other way around. Note that interest rates have already risen substantially in the bond market, well before the Federal Reserve has raised rates, which we expect them to do soon. Federal Reserve moves tend to be lagging indicators.

As to politics, they tend to have far less influence on markets than most folks think they do. Corporations find a way to sell products and services under both Democratic and Republican administrations. That said, we do worry about Chinese politicians, but for a different reason than you might expect. We believe that in their autocratic ways, they have encouraged property speculation and debt in a way that makes our 2008 mess look mild. But the Chinese supply much more to the world economy, then they demand from it. Therefore, a Chinese recession, if in fact that happens, will not sink the world economy, in our opinion. Though it could throw the markets for a scare for a while.

We do fear inflation, and we have recently written about this. Because of inflation, we suspect that returns for stocks and bonds may not be very good this year, and we certainly expect returns will not be as good as the last three years. But from a longer-term perspective, we are less concerned. As opposed to previous extended bouts of inflation like the 1970’s, there a two key differences. First, manufacturing and resources are far greater today than they have ever been. The world’s supply chain is much larger because of the emergence of countries like China over the past 30 years. Eventually, the supply chain will catch up with today’s shortages, even if the pandemic persists.

Second, the developed world, where most of consumption comes from, is getting older because we are living longer and birth rates are falling. Older people make up a larger percentage of the world’s consuming population. Older people consume less and this is disinflationary. Continued technology developments have also proven to be disinflationary. Therefore, we fear inflation in the short term but less so in the long term.

Finally, we’d like to point out two reasons why we do not think a bear market is imminent. The first is that the world economy is stronger than you may have heard. Fourth quarter GDP growth was reported at 6.9% by the government’s Bureau of Economic Analysis. GDP is reported in “real” terms. That is, inflation is subtracted before it is reported. In what they call nominal numbers, reality as you might say, GDP growth was 14.3% in the fourth quarter. The economy is humming along. Even if it slows a little bit, we are still a long way from going backward. SLOWING growth is still growth, not a recession.

Second, stocks actually got cheaper in 2021. “Wait,” you say, “come again?” Yes, the percentage increase in profits (earnings) for the S&P 500 companies from 2020 to 2021 was even greater than the large increase in their stock prices, resulting in a reduction of the “next twelve months price-to-earnings (P/E) ratio, from 22.3 to 21.2.1 In other words, there was a good reason stocks went up, companies made a lot more money.

Marc Chaikin is best known for creating the first real-time workstation for portfolio managers, not for his predictions. He is now one of many prognosticators making a living selling fear. Don’t fall for it.

1 – JPMorgan Guide to the Markets – 12/31/20 and 12/31/21

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of John B. Burke and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

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