The market’s been up lately. Inflation has remained down lately. How long will either or both conditions be around? If I could make that call, my family and I would be lounging on a beach, having already amassed all the fortune we need. Until then, we continue strengthening our understanding of the relationships that do – and do not – exist between market conditions, economic indicators and our own investment activities.
Is the Market on a Roll, or Spinning Out of Control?
For those keeping even a casual eye on the U.S. market, it would be hard to ignore that it’s been behaving like a giddy contestant on the Wheel of Fortune lately. During the week of May 6–10, the S&P 500 Index spun past a 1,600 milestone, both beginning and ending the week at new all-time closing highs of 1,614 and 1,633, respectively. The following week, it seemed to say, “Let’s spin again, Pat,” having hit yet another record market close of just over 1,666 on Friday, May 17. As of this writing, it’s dipped a bit but remains gamely over the 1,600 threshold.
What does that mean to you as an investor? Not much, because nobody knows what’s around the next curve. The title from a recent Business Insider column says it all: “Literally Every Strategist On Wall Street has Been Wrong About The Stock Market.” The article points out how it’s only May, and the S&P has blithely blown past even the most optimistic prediction from 14 of the best-known Wall Street strategists who laid their January 5 opening bets for the S&P 500’s year-end numbers. Even the most optimistic prediction, which happened to come from Citi, called for a year-end target of 1,615.
Of course the year is still young. Citi and friends could still turn out to be correct in their prognostications. But as any contestant will tell you, the best way to win the game is not necessarily to guess right on all the highest calls. It’s to avoid having to stage a recovery after landing on “bankrupt.”
If you hold a globally diversified portfolio with an allocation to U.S. stocks, you should already be well-positioned to reap appropriate benefits from the current market surge. If you’re not yet positioned according to your personal long-term financial goals and risk tolerances, I’d say now is as fantastic a time as any to get started, with the fiduciary advisor of your choice as your guide.
Predicting Fiscal Policy (and Other Acts of Frustration)
Another Frequently Asked Question we hear is whether our current low-inflation environment will sooner or later explode in our face. On that count, I am reminded of a comment reportedly made by Laurence J. Peter: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”
Not to knock economists any more than anyone else seeking to forecast the future, but the take-home is again: Who knows? Fellow investment advisor and Multifactor World blogger Jared Kizer recently posted an insightful article, “Is High Inflation All But Guaranteed?” In it, he explains why you can’t rely on all of the so-called guaranteed economic indicators in an attempt to predict what the future holds.
At first blush, it would seem logical that the Fed’s policies on monetary supply would have a strong connection to future expected rates of inflation. But, as Kizer points out, the Feds are only one factor in the capital market equation. There also are banks and businesses and people like you and me. In this free market eonomy of ours, each of us gets to decide mostly on our own how much we’d like to spend, lend and hold in reserve.
That’s not to say higher inflation is impossible, but neither is it guaranteed. The point is, in place of attempting to respond to an uncontrollable unknown, we recommend you turn your gaze inward. What are your economic realities? Are you in an environment – such as being newly or nearly retired – in which high inflation would significantly harm your desired lifestyle? Or do your personal circumstances mean you could ride out the crest should it occur? Either way, there are actions you can take (such as allocating toward or away from inflation-protected securities, or shortening/lengthening the term on your bond holdings) that make more or less sense for you.
In short, you cannot expect to manage the economy or the markets. Attempts to do so could leave you dizzy if you tried. But you can manage how you choose to participate in the same, based on your unique financial goals. In that regard, we can help … and that’s no run-around.