By Kyle Tetting
I’m continually surprised by markets. That might sound like a confession an investment professional shouldn’t make, but it’s the reality of being an investor. In trying to anticipate the shifting winds, investors emphasize different aspects that can lead to different conclusions, sometimes wildly. As a result, even when we’re in agreement on the facts, expectations for outcomes can look wildly different.
It’s why I’m struck by just how many prognostications continue to float out there. Vanguard, in a recent update, went so far as to say that based on a “historically low global equity risk premium” that a 60/40 balanced portfolio should look more like 70% stocks and 30% bonds. While I agree with the underlying facts – specifically that stocks are meaningfully more expensive than average, this is a tough sell to a bond investor just a few short years after one of the worst years for bond returns in decades.
Learn more
Clarity amid uncertainty leaves questions, by Kyle Tetting
Rare U-turn raises yield curve concerns, by Adam Baley (pending)
Volatility: Stock market vs. your portfolio, a Money Talk Video with Kyle Tetting
Rebalancing: Too important to ignore, by Steve Giles
Turned indicators
Our own Adam Baley just wrote a well-researched article looking at the yield curve that draws many of the same conclusions, but from a very different set of facts. In reviewing history, Adam notes that responses to certain yield curve shapes – including the rare U-shape we currently see – have tended to be accompanied by periods of heightened economic uncertainty. Adam’s conclusion for investors, while more measured, points to a similar thought process regarding reducing risk.
Add in broad economic concerns from weak consumer sentiment and businesses unsure of what to do amidst other economic uncertainty, and yet another set of facts may lead you to even more of the same conclusions.
It seems the data and the experts are aligning to tell us now is a good time to pull back on risk. And, broadly speaking, we have. But I’d caution that there is more than one way to view our investments in light of this data, and most of it isn’t new.
Concerning signs
Interestingly, our economy has been showing signs of stress for months. The yield curve has been flashing warning signs at times in recent years, and stocks have been expensive for what feels like many years more. Nevertheless:
- Businesses have continued to innovate their way to profitability.
- Consumers haven’t meaningfully pulled back.
- The yield curve hasn’t spelled doom.
- Stock valuations have seemingly become more stretched.
It isn’t because we solved the problems. It’s because as investors we properly place the expectation of a solution in the right hands.
Response to surprise
In short, publicly traded businesses are well suited to respond to uncertainty. As investors, our investment, our hard-earned savings, provide the capital necessary for businesses to respond. In other words, we don’t look to invest in certainty because the opportunity lies in the unknown.
To that end, we should be prepared to again be surprised by markets. While we continue to look for ways to lean away from risk, I remain extremely optimistic about the role that stocks play for the balanced investor long-term.
A steadied consumer, aided by the growing ranks of retirees with their fixed retirement incomes, helps to steady the near-term outlook, while the longer-term opportunities in technological innovation and the spending impact of a generational wealth transfer create immense opportunity in the foreseeable future.
The result, unsurprisingly, is that the appropriate balance continues to be the best way investors can help to manage the near-term questions while participating in what remains an immense long-term opportunity for stock investors. That balance continues to shift, but don’t underestimate our ability to be surprised.