Letter from America: You can't fix stoopid
Almost seven years ago in a crazy diner in Tampa Bay’s Anna Maria Island my old friend Pete introduced me to what he called “the Brains Trust”.
It included folks such as John, who talked like John Wayne and hailed from New “Yoik”. Also in attendance most days was David a professor in psychology, and Big Bill, a retired police chief from Toledo who’s mantra in life was ” You can’t fix stoopid “.
Their daily topic of conversation was how the financial crisis in Greece was about to wreak havoc on the US stock market . “Tell them how small the Greek economy is”, Pete would say to me.
So I asked them how big they thought Greece was in relation to Florida in GDP terms. They had no idea. They were all stunned to learn that back in 2010 Florida’s GDP was three and a half times bigger.
Perspective is a wonderful thing, though often ignored. In an email exchange this week my old school friend Alex,now in Adelaide, was astonished to learn that today Florida’s GDP (income, in everyday language ) is 30% bigger than that of Switzerland, and now more than four times the size of Greece’s.
Florida, despite having no state income tax, and allegedly full of theme parks and ageing snowbirds is the fourth biggest economic powerhouse state in the US.
Texas, with the second biggest GDP is as big economically as Canada. And California at $2.5 trillion is now as big as France which, depending on who you believe, is the fifth or sixth biggest country GDP in the world.
In the intervening years, and in spite the Greek economic fears, US fiscal cliffs, QE mistakes, Brexit and Trump, world stock markets, have soared. This is much to the amazement of the coffee morning’s sole survivor David, the now retired prof of psychology. Sadly, the others, including Pete, have passed away.
Last time I was here on holiday in late February 2016 – an even worse time to be a stock market investor – the main markets had seen their worst ever start to a year. This came as a shock to market commentators, who’d predicted another poor year following 2015’s disappointing performance.
No doubt they felt that way thanks to what is called recency bias. You take what’s happening in markets and simply assume that it is going to continue. Wrong.
If you’ve looked behind the constant “Aw Naw The Baw’s Burst ” headlines in 2016 you, like David, will be taken aback to see the big double digit gains plus dividend profits patient equity investors made last year.
From memory the S&P 500 total return, sterling adjusted, is up 38%, the FTSE is 20% higher, while safe gilts and cash have done zilch.
Poor David. Like so many other investors over here and in the UK he was seduced by TV talking heads convinced it was time following Brexit for a Sharpexit. And that was before “the dangers of Trump”. David went to cash and missed the significant upswing in stock markets.
So where are we now? Well, it looks like investors are doing what they always do, either moving funds into last year’s winners , or piling into “safety”. Consider the evidence. The third biggest outflows in UK active funds in 2016 was from M&G Global Dividend which went through hard times in 2015. Guess what? It’s up last 12 months….. 43% net of charges.
Huge continued inflows pile into absolute return funds. The biggest is Standard Life GARS, up only 4.1% over the three years as folks have rushed into it. Last year one of the top recipients of inflows is INV Perp’s Targeted Absolute Return fund, up only 3.6% in the last 12 months.
What does all this tell us? Sir John Templeton used to say stock markets crash on widespread euphoria, and keep rising when pessimism is around. Now while it doesn’t appear euphoria is about, it does seem from sentiment numbers over here there’s a wee bit too much short term confidence around right now.
So I’d keep vigilant and be prepared to buy any weakness. I’d also heed big Bill’s mantra…. don’t follow the herd….because “you can’t fix stoopid”!
Performance figures source: Lipper Hindsight
Fund Flow data source: Investment Week