2014-01-31

Optimism? Pessimism?


Bullish or bearish?

Market strategists are often put into one of two camps: perma-bears, who deliver a steady message of doom, such as “prepare for the imminent collapse,” or perma-bulls, who always see the rosy side.

In my work, I’ve never run across anyone who fits these simplistic labels. I find that most of my fellow strategists and economists are trying to sort through and evaluate large amounts of conflicting and puzzling data. We face the reality that the world around us is always changing, and our forecasts may need to adapt to what we actually observe.

Market pundits and the media, on the other hand, apparently don’t need to limit themselves to working with facts, and they often have short and selective memories. So they assign labels that are inaccurate or misleading, and find fault with strategists who end up in the wrong camp.

Here at MFS, we see no point in picking a stance and backing it up with sifted and selected facts. We approach the market in much the same way we look at an individual company: We size up the fundamentals, probing competitive costs, product strength, balance sheet resilience, management skill and integrity. Then we evaluate the future prospects, making a judgment based on the array of current data. We generally find that our approach has worked in both up and down cycles of the economy and the markets, as well as for individual companies.

Risk on or risk off?

The memory of episodes of market paralysis during the 2008 – 2009 financial crisis may have kept investors from seeing the possibility of regrowth and resurgence. Even in 2010, after the economic recovery was underway, investors stayed on the sidelines, believing that there was still too much debt in the system, but private sector debt was soon worked off. Over the next couple of years, more investors stayed away, convinced that profits had peaked, but they missed out when profits continued to rise.

Then there’s the claim that fewer full-time workers are employed now than at the previous cycle peak, and the conclusion must be that it’s still not a good time to invest. But this misses the point. Those with jobs in the private sector are working longer hours and being more productive. While some might argue that the 2.4% annual growth of US GDP reported so far in this cycle has been below par, others could dig deeper and find that the private sector has been expanding at 3.4%.

The fact is that companies in the United States and around the globe are in their best shape ever: Their products are better, their balance sheets are healthier, their margins and returns on equity are high by historical standards.

Right now the markets are going through a risk-off period, showing an aversion to risk not seen for more than a year. Many emerging countries are stumbling, and investors want to take some money out of the market. This is normal market behavior and does not suggest that bias and opinion should drive action.

Biased or open minded?

Should investors be bullish or bearish? My answer is neither. The best stance is to be open-minded, considering the risk of downward spirals, but balancing those possibilities against factors like cash flow growth, competitive advantages and costs.

There is no reason to be optimistic just because it feels better to have a sunny disposition. Be optimistic if the facts warrant optimism. For investors sizing up the US markets, the advantages inherent in cheaper natural gas and technology — which can be used to cut costs and sell at more competitive prices — are likely to win out over the long run.

Be pessimistic if the facts are disappointing. Or be pessimistic because someday you will be right and then you can say, “I told you so,” or write a book about calling the next collapse.

Meanwhile, the cautious but fact-driven investor is the one smiling because the S&P 500 is up 165% since March 2009 and her equity portfolio is up, too. She’s also likely to be the one who doesn’t panic in the midst of a selloff — the one who sees a market correction as a potential buying opportunity that can bring about renewed growth in the next round.




No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

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