When Markets Say One Thing And Do Another

Many commentators on the short-term state of markets are warning that investment results could get much worse. Bond and stock markets, both domestic and international, have been testing investor patience over the last few months. The attention-hungry headlines don’t square with many of today’s realities. Here is some added context.

Voting and weighing

Warren Buffett says that in the short term markets are a voting machine, and in the long term they are a weighing machine. Buffett prefers the weighing measure and we agree. We know how quickly a major trend can reverse via the voting booth. 2016 and 2018 are prime examples. Similarly, the seesaw track of the US bond and stock markets leaves almost all investments in slightly negative territory for the year while cash sits as the number 1 performer. However, when you weigh the results over more than just the calendar year, the performance metrics are reversed. To put it another way, over long time frames there have been significant returns in both the stock and bond markets and near-zero returns on cash.

Timing The Market Is Against You

With such volatile markets this year, the temptation to time the market has been high, and as dangerous as ever. In order to be successful at market timing, you have to be able to make two precise predictions: the correct time to exit a market and the correct time to re-enter that market. With too much noise in the short term, no investor can do this with any consistency. It’s even more difficult today given that algorithms are playing a larger role than ever before in the short-term price swings.

The alternative to market timing – patience and persistence – is challenging as well. Market dips are unpleasant, jarring and can deal a real hit to investor confidence. Just three short months ago the S&P 500’s performance was up over +11% for 2018 including dividends. This recent drop, however unpleasant, is a normal correction. The urge to act out of fear or protection is natural and justified. However, financial reactivity often does more harm than good. In a conversation with one of our CPAs this week we were reminded of this pithy phrase: “Money is like a bar of soap, the more you play with it the smaller it gets.”

Heading into 2019

One important decision for long-term investors heading into 2019 is how much to hold in cash. We recommend anywhere from zero to thirty percent, depending. Zero percent is for investors who don’t need to take any money out in 2019. Thirty percent is for those who must withdraw large sums of their capital next year. A withdrawal reason might be an investment in a new business, the purchase of an already identified new property, or a large deferred tax bill. For anyone who needs to hold a cash position in 2019, there are ample returns in the short term Treasury Bill market which can be used to augment cash holdings.

How Quickly Things Can Go Right

All the reasons that the bond and stock markets will suddenly go down can reverse just as quickly. The negative headwinds are higher interest rates, excess debt, China, political gridlock, and profit pressure. Imagine the opposite of those headwinds: the Fed stops raising rates, China agrees to trade peace, bipartisan Congressional action, and rising profits. All possible. And they don’t require a lot of time.

There are already many positives right now: rising dividends, reasonable valuations, reasonable profit margins AND growth, low interest rates, low unemployment, and subdued inflation. Given the current state of the playing field, there is no reason to assume that down is the only possible direction for markets in the months ahead.

Get Ready For 2019

The next year is only 11 days away. If you would like to discuss your strategy for next year please call or email us. You can set a reasonable allocation no matter what is happening in the short term.

Weekly Articles by Osbon Capital Management:

"*" indicates required fields