The Slow Trek Towards the New Economy
“We must all suffer one of two things: the pain of discipline or the pain
of regret and disappointment.”
Ever wonder why September and early October are often choppy periods for the market?
Well, for me I see September as a time when we’re just coming off the haze of summer – the back to school, back from the beach, back from vacation mindset – and peering towards the end of the year while wondering about what’s next.
And October brings back memories of previous crashes, like Black Monday in 1987 with 22% losses in a day, and October 2008 igniting a six-month odyssey of a halving of the averages.
These months, at their essence bring out the weakness of our minds to withstand fears of events from the past.
And here, this year, we add politics and media vitriol stoking false hatreds while serving us choppy waves of a few days up followed by a few days down.
Throughout investor sentiment has remained in the tank even as economic data shows the recovery continuing its slow trek towards the new economy.
Ultimately, this all serves as a positive foundation for long-term investors who can discipline themselves to look beyond now - and into "what's next" ahead.
The "System" is Ok
Much chatter during times of concern often centres around the actions of the US Federal Reserve.
It’s all very “Wizard Behind the Curtain” stuff - how they "got us here", how some magic hand is at work that takes everything from us, as though mankind is some sort of pawn in a game; a weak army of robots careening down a less than yellow brick road.
It’s foolishness, and a sure sign of thinking and investment actions that have missed out on the magnificent opportunities I’ve seen birthed in the 38+ years I’ve been in this business.
Alas, the system, while not perfect is hurtling along a pathway to even greater opportunity ahead, but with the codicil that you must be patient enough to allow it to unfold.
That’s the toughest part.
Inflation is not eating us alive.
And for all the chatter about the Fed "printing money" and creating a fire of inflationary pressure, the pace has stayed right at about 2% for nearly two decades now (as above).
One of the main drivers of that steadiness is the cost of energy in the consumer budget:
The other element helping the consumer is the massive refinancing activity showing huge savings on a per household basis.
Banter of rocketing rent costs just 24 months ago have been met with the front edge of 88 Million American kids beginning to buy their first home.
And they’re doing so at rate costs never before seen by the housing market while delinquencies hit record lows:
Next up is how you’ve heard, that "the spread" will be the death of us all, given all the "tinkering" the Fed is doing to "screw things up."
The reality? The spreads are just fine, nearing exactly where they have been, on average, for the last several decades:
But you’d never know about any of this from watching the mainstream news or judging by investor sentiment.
Those things are what’s in the tank right now.
Have a look at the outflows first, and then the dire sentiment across the board:
We don’t see these levels very often (above).
And sentiment, once again, lights the way:
Above is your 8-week moving average of the AAII bullish readings.
They show what’s setting the stage for 2021, 2022 and beyond.
The red line is there to train your eye on the idea that we are rarely at these levels.
All of this is happening even as the jobs market (below) creates new jobs at nearly pre-COVID shutdown levels.
The power of the underlying economy to adapt to change is unmistakeable:
Sure, more choppy waters are likely as the election approaches. And the media will do its best to knock you off focus by grabbing at your fears.
It is our job to be disciplined in our planning.
And it’s imperative to remain patient during the tough times.