Mid-Year Thoughts on the Markets & EconomyInvesting Baron Team Insights
A 90-second read by Victor Cannillo: There are always concerning headlines, disappointing economic results and fears about the future. This is exacerbated by the financial media, which is why I always advise investors to turn it off; ignore it. And if you just can’t help yourself to look, at the very least do it with the correct lens. That lens is that the media is all about getting you to click or tune in.
Whether times are good or bad, the media often will portray things negatively. Year-to-date there are two main “stories” – the fear of inflation and a heated market. Understand that the “evidence” used to make these stories can be highly biased and incomplete. Data mining is when you select the data that supports your story and ignore all the rest.
Rising Inflation – There is no doubt that some sectors of the economy are experiencing strong inflation as demand outpaces supply. As prices rise, the demand will naturally decrease while supply chains catch up. This can go both ways (inflation and deflation) as the markets adjust. Think of hand sanitizer last Spring. You couldn’t find it, and if you could the prices were quite high. Now companies are giving the stuff away due to oversupply and drop in demand. Eventually it will work itself out and find a long-term equilibrium price.
We haven’t experienced much inflation at all (as an overall economy) for a long time. We aren’t used to it, but a little inflation is healthy. While we don’t know what will happen, experiencing strong inflation or even deflation are possibilities, but the base case at the present moment (most probable scenario) is some inflation. You may hear nothing but stories of inflation, but I assure you there are ample economic reports showing a lack of overall inflation.
Heated Market/Economy – Stock market returns over the past decade have been higher than the long-term average. You might be thinking, “we’re due for a change”. Not necessarily. If you look at market performance since 2000 (two decades of performance), you will find that stock market average returns were lower than the long-term average. So which is it? Have we experienced higher or lower returns than average? It depends on what dates you use. Market timing is a losing proposition. Best to just stick to the strategy and the plan.
There are some reports of consumer debt being at an all-time high. But what they don’t say is that household debt, as a percentage of assets, hasn’t been this low since the 1970’s. Our collective net worth is healthy because household assets have been growing at a much larger pace than household debt. That one piece of information changes the entire story. This is a major reason why investment decisions should not be based on headlines or “expert” prediction. There are often two sides to every story/prediction.
Final Thoughts – I don’t know what is going to happen going forward. That is why we follow a disciplined strategy based on your risk preference and Your Personal EconomySM, the aspects of your life that are most important to you. We adhere to our plans and let the talking heads say what they will and the market do what it does.
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Disclosure: This is a general communication being provided for informational purposes only. Every investment strategy has the potential for profit or loss. This material is not intended to be relied upon as a forecast, research, tax or investment advice.
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