David Merkel, CFA, applies an interesting truism to the market:
As a fish you don't notice the water that you swim in. We are so absorbed in the zeitgeist (Spirit of the Times) that we usually miss that other eras are different. We miss the possibility of turning points. We miss the possibility of things that we would not have thought possible, like negative interest rates."
It's inherently difficult getting critical perspective on what is so close to us. Nevertheless, Merkel says there is no avoiding hard thinking on some of today's key questions - such as whether companies will be able to pay their dividends.
In another article, related in theme, 720 Global argues that investors need to distinguish between the market narrative and the truth behind it. The author takes you on an entertaining stock-mania journey as the market was meant to crash with a Trump victory, yet the market narrative out there somehow changed to accommodate unexpected developments.
Both authors hit on something important.
First, per Merkel, there is such a thing as a zeitgeist, an esprit du temps; (we really need a pithy English-language equivalent to this). These seasons, if you will, can shift quite dramatically. Ronald Reagan may have been rolling in his grave the past eight years of the Obama era and now look, still-living Hillary Clinton supporters are in shock and grief at the coming of the Trump era.
Time will tell the shape of things to come, but in this regard, 720 Global has a point. Whatever the prejudices of a certain era are, there is a fundamental reality that cannot be denied. As 720 puts it:
As investors, we must understand the popular narrative and respect it as it is a formidable short-term force driving the market. That said, we also must understand whether there is logic and truth behind the narrative. In the late 1990s, investors bought into the new economy narrative. By 2002, the market reminded them that the narrative was borne of greed not reality. Similarly, in the early to mid-2000s, real estate investors were led to believe that real estate prices never decline."
In other words, both authors are warning us to keep a critical perspective on current events. Yes, there is a flavor of the month - or decade, perhaps - but no political leader or market force gets to select its own reality.
Please share your thoughts on this topic. And, here are a few advisor-related links on today's SA:
- Talk about a new zeitgeist: Steven Mnuchin, expected to be named Treasury secretary, is looking at scrapping Dodd-Frank and cutting corporate taxes to 15%.
- Ian Bezek comments on slowing dividend growth rates.
- Kevin Wilson: The Fed has trained investors to react predictably to low rates, but will investors be able to adjust to a Fed that is now raising rates?
- Columbia Threadneedle Investments on what investors need to know about the Italian referendum.
- For more content geared to FAs, click here.