Review & Outlook

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

Thoughts on Our ‘Tranquil’ Markets

19 May, 2017 by Mark O'Brien in Commentary

“Investor fear gauge lowest since 1993,” said a recent Wall Street Journal headline (5.8.17).

While I am a tad skeptical about trying to quantify sentiment (what is an “investor fear gauge” anyway?), I am prepared to accept the central thesis that investors feel pretty good right now.  There was a momentarily blip when the market sold off on Thursday of this week, apparently in response to worries about President Trump.  But on Friday the sell-off reversed itself, and in any case,  corporate earnings for the first quarter 2017 are coming in at around 14% above the year-earlier period, which is respectable and certainly more than expected. Employment continues to tick up; the government sets the statistic at 95.6%, which is close to “full employment.”

To be sure, the government measures employment in funny ways (some would say phony ways), but there’s no denying the jobs picture is improving. As for stocks, they are not cheap, but neither are they off the chart, as they were in the late 1990s.  Nor are they gyrating in price, as often happens in times of speculation.  Said another Wall Street Journal article (5.04.17): “stock price volatility has vanished.”  Indeed, the apparent tranquility of the markets is remarkable, maybe even astonishing, given the rancorous state of our politics.

So what are smart-money investors doing in this time of tranquility? According to the Wall Street Journal and other financial media, many have been shifting money from U.S. stocks to European and emerging markets.  Since 2009, runs the rationale, U.S. stock prices are up a towering 165%, as compared to 100% for European stocks and a mere 75% for emerging markets. Now its time for emerging market and Europe to step out, goes the thinking, and the preferred vehicle is passive investments (index mutual funds and exchange-traded funds or ETFs), where you can own all the stocks in, say, Brazil, Russia, China, Germany, with the press of a button, at relatively little expense. “Now that growth is picking up around the globe,” says the cover of Barron’s magazine (5.15.17), “it’s time to start buying.”

Barron’s offers a shopping list of emerging-market index fund investments, which might well be a good speculation, and we would not hesitate to consider a few — in a limited sort of way, say 5% of assets. It is always good to have some place for lightning to strike. But anything more we would hold off. Rather we would use this time of relative tranquility to get to know even better the individual stocks we already own. Knowledge of a company’s business can give staying power when the storm comes — and it will.