February 13, 2018
So far, February has reaffirmed itself as my least favorite month of the year. We have had snow, freezing rain, hard rain, super cold winds and now the markets just kicked us in the shins. Frankly, I am ready for March and a bit more normalcy. Perhaps a month where the word, volatile is neither uttered nor thought of.
Enough complaining, let’s talk about what we are going to do about these darn markets. The only correct response to this momentary loss of investor sanity is to do nothing. Our job is to simply ignore these daily and temporary market gyrations. This is like the weather; not many people like February in Maryland, but it does not materially affect our long-term outlook on our lives. It is just the weather, and what it did in the first two weeks of February will be long-forgotten in July.
Why this market volatility is happening is equally unimportant. I will only say that one of the reasons posited for the panic-du-jour is the chance and fear that interest rates will continue to rise. And the closely followed rates on the 10-year US Treasury Notes has indeed moved upwards from 2.465% on January 2, to 2.851% on February 8. (CNBC) (FYI, the mortgage rate when I was buying my first residence was around 18 to 19%.)
There are quite a few culprits driving up the 10-year and for our purpose, none of which are that negative. Mostly the rising rates are due to an economy that might be starting to over-heat. We have had stimulus from the new tax-bill, near full employment, euphoric consumer confidence, increased wage growth, topped off with $300 billion in new fiscal stimulus and there you have it, a powerful cocktail for a rise in rates.
The markets have priced in another 3 Federal funds rate increases this year. Now, with the economy running hot some economists are beginning to think maybe 4 or even 5. We should be so lucky to have these problems. Stong economies make strong markets—and regardless of how inept our policymakers are (Federal Reserve, Congress, Regulatory and Executive Branch to name a few), there is simply no way they can stop this progress. The Federal Reserve is said to be the only agency that can take the proverbial punch bowl from the party at just the right time. This time they are behind the curve so to speak—the party is already out of control and I think there will be higher inflation on the horizon.
But again, these are good problems to have. But be careful as this newsletter comes from the keyboard of an eternal economic optimist. My favorite saying is, “Optimism: The only Realism.” So don’t just listen to me, even New York Times Journalist Nicholas Kristof, certainly no fanatic for capitalism, agrees. (The New York Times, January 6th, Why 2017 was the Best Year in Human History) Https://www.nytimes.com/2018/01/06/opinion/sunday/2017-progress-illiteracy-poverty.html
Mr. Kristof’s reports in his NY Times article that a “smaller share of the world’s people were hungry, impoverished or illiterate than at any time before.” More fun factoids reported by Kristof:
Every day, the number of people living in extreme poverty goes down by 217,000
Every day, 325,000 more people gain access to electricity
Every day, 300,000 more people gain access to clean drinking water
Since 1990, more than 100 million children have been saved by vaccinations, diarrhea treatment, etc.
Since 1960, when the majority of humans were illiterate and lived in extreme poverty, now in 2017 fewer than 15% are illiterate and fewer than 10% live in extreme poverty
And just yesterday, I watched a private US company owned in part by Elon Musk launch the Falcon Heavy Rocket with, among other things a Tesla Electric Roadster, out of Earth’s atmosphere and on its way to an elliptical orbit of the Sun and Mars for about a billion years. (Unless it runs into an asteroid.) And during the launch and as it floats the space the car’s radio is playing David Bowie’s, Starman.
So when our day-trader’s, computer-algorithms and hot-money start panic-selling we just need to look the other way and shake our heads. We choose not to participate in the foolishness. Nothing has changed from this week to the third week in January.
We have mentioned this before, but it bears repeating (often,) the equity markets have, over the last 38 years, at least one intra-year correction of an average of -14%. Or in my vernacular; we get kicked in the shins at least once a year to the tune of minus 14%. Plus, one year in five or six, the markets historically retreat an average of about twice that. And finally, EACH AND EVERY time after these investor hissy-fits, the markets resumed their permanent advance in both value and dividends. How else could we explain the record number of record highs in 2017 and in January 2018?
We did not stick around in the doldrums and malaise of The Great Panic in 2008 and 09. We turned the corner and marched on, riding the backs of the best companies and innovations in the history of the world. This volatility is temporary and normal. This volatility is the very reason we are paid a premium for our investments. So if nothing has changed in your long-term goals, then nothing should change in your investment policy.
Thanks for reading my friends—and my tip this month: use that February Statement to start a nice fire in the fireplace and grab a great novel instead. Wait for the end-of-year summary in December—you will lead a much happier life. Marty
