Monthly Archives: October 2013

‘Tis a Puzzlement!

Harper’s magazine occasionally publishes something called “Harper’s Index,” which cleverly compares various data points in order to make a point or illuminate some of the irony that exists in our funny old world.  Here are a few examples from the June 2013 edition:

  • Percentage change in the past 25 years in the Consumer Price Index: +41%
  • In the price of beer:  +40%
  • Of books:  -1%
  • Percentage increase in per-student spending at major public U.S. colleges since 2005:  23
  • In per-student spending on college athletes:  61

Clearly, the editors have a point of view in all of this, but I really enjoy reading this part of the magazine because of its focus on data.  I’m willing to listen to anyone’s point of view if it’s backed up by clear data.

A number of seemingly incongruent data points this week caught my eye:

  • The Dow Jones Industrial Average hit an all-time high
  • According to Real Clear Politics poll, the approval ratings for Congress and Mr. Obama hit five-year lows.
  • The American Association of Individual Investors sentiment survey shows bullishness at 49%, the highest level since 2010.
  • A UBS poll shows investors holding 23% of their portfolios in cash, the highest level since 2010.

These data only underscore the challenge of making sense of investing looking at “big picture” or macro factors.  Why is the stock market at this level, when there remains a palpable malaise in many parts of the country and the world?  How can the government be so disliked, but the stock market can be enjoying its fifth year of a bull market?  How can individual investors be bullish about the market and at the same time raise cash? I will admit that I cannot always make sense of the data out there.  This is why I spend very little of my mental effort and research time on the macro stuff.

Here is what I know:

  • It is still pretty easy to find stocks trading well below their intrinsic value
  • Pockets of pessimism persist aplenty – poor sentiment is usually a positive for stock prices
  • Interest rates are likely to remain low for a while
  • Corporate cash flow remains strong and cash on balance sheets remains near an all-time high – this condition usually coincides with the start of a business cycle rather than the end
  • Traditional excesses warning of a possible recession are nearly non-existent

All the macro puzzlement aside, what I know leads me to believe that the bull market in stocks is more likely to continue than to end abruptly.  Corrections within a bull market are normal and unsurprising.  Some pause in stock appreciation after a big rise (like we’ve seen this year) is also normal and to be expected.  Yet, I continue to think that the biggest risk for investors is to be out of the market.  Cash returns are well below inflation at this point, and investors holding cash are probably hurting themselves while at the same time believing they are “safe.”