Review & Outlook

Our take on the investing, financial, & economic themes of the day

Thinking About a New Metric in a Low Growth Economy

18 December, 2015 by Mark O'Brien in Commentary

Investors don’t like the interest rate hike. That’s becoming clear. As I write the Dow Jones industrial average is down 250 points. Yesterday it was down as well. Though the interest rate hike was a mere quarter of a percent (25 “basis points” as we say in the trade), and though the hike was off a zero base, that was enough to spook the market. Stocks are now in negative territory for the year. Just a couple of weeks ago, they were positive on the year. It’s been like this all year: Up, then down, then up, and now down again. Bummer, as the kids say.

What to think? For starters, remember that three-fourths of the time the stock market goes up. I am indebted to my OBG colleague Paul Devine for reminding me of this market statistic. According to Paul, the Standard & Poor’s 500 stock index, which is the leading measure of the stock market among professional investors, has been up 63 of the 87 years since 1927. That’s 72% of the times. (So three-fourths is only a slight exaggeration.)

As a ballplayer of every sort, I like these odds. I find them consoling and encouraging. They make me think long-term, for if I know I am going to hit the ball 72% of the time, I ‘m going to swing, because there’s always next year. Time is on my side. But going up is not enough, of course. It is the size of the increase that counts. And here there is cause for concern, for while a few big stocks and sectors are doing well enough to buoy the market averages (one thinks of Facebook and Amazon), most companies are straining.

The problem is growth. Most companies are having trouble growing.   In this they reflect the larger economy here in the U.S. and around the world. What’s causing the problem? My guess is the zero-interest rate policy of central banks enables too many companies to hang on indefinitely. These players, who should go out of business, are ruining profitability for everyone. But whether it is this or something else, no remedy is in sight. And so most companies and investors are stuck in a low growth environment.

In the new low growth/ low return environment, perhaps the metric for evaluating portfolio performance will shift away from price appreciation to a metric of current income. That’s how people looked at stocks in the 19th century: they focused on dividends, their rate of increase, their appropriate taxation, their security. The obsession with price performance is a relatively recent phenomenon. What you measure is what you manage. Maybe the profession of money manager should spend more time measuring, and managing, for income.