You Got to Know When to Hold ‘Em
By John Stoltzfus,
Chief Investment Strategist
Everything and the Kitchen Sink
Notwithstanding storms of epic proportions, the equity market pullback was relatively limited
Despite two major hurricanes of record-breaking status (in terms of damage, destruction, and disruption), along with the worst earthquake Mexico has experienced in 100 years, as well as increasing geopolitical risk on the back of threats of a nuclear attack coming from North Korea, the markets stateside and abroad appear to have digested the news with considerable aplomb—producing little more than a blip on the market radar screen.
Is it animal spirits, irrational exuberance, or abject complacency that has led investors of varied types—from bulls to skeptics—to not blink or turn tail and run, but rather to face the music and consider the risks and opportunities at hand when faced with adversity?
To us it appears that investors are increasingly taking notice of the fundamental improvements in the US economy as well as the ongoing economic recoveries taking place in developed and emerging markets around the world.
Whether it’s improvement in manufacturing, job creation, sentiment, or innovation across the sectors leading to greater efficiencies, market participants this year appear to be “keeping the faith” and looking to even better growth ahead but not at an exaggerated pace or at a gait requiring “great expectations”.
It’s what we refer to as the Bernanke legacy “Einstein market” where everything is considered as relative to an array of factors that lie on the economic landscape.
We believe we are at a point in time where degrees of recovery, growth and overall progress in the economy are seen relative to where we were and where we’ve come from since The Crisis in 2008 and the rally point in March of 2009.
Expectations that the economy today eight years into the recovery from the worst recession since the 1930s would be further along than it is may be unrealistic based on the depth of The Crisis as well as the challenges that have resulted from advances in globalization and technological progress.
“The storms in Texas and Florida devastating as they are today are likely to provide at the local, regional, and national level a positive bump for the economy in the months ahead.”
Lowered barriers of entry to competition on a global basis have created an abundance of goods and services worldwide. In addition, outsourcing and “reshoring” have broadened the accessibility of a global workforce, which has kept wage growth in check. As a result, global growth and prosperity are challenged by deflationary trends that even the unprecedented and extensive efforts of central banks have yet to overcome.
To us the challenge seems not as much a conundrum than simply a long and drawn out process of recovery for economies and markets. This, coupled with the need for businesses, governments, and labor to adapt to outsized technological advancements, has resulted in a path of recovery that has taken more time to travel than most of us would ever have expected nearly a decade ago.
So far patience has often been rewarded for investors who have practiced it. We believe more of that virtue is likely to be required before normalization is a reality.
Monetary policy, wage growth, globalization, and technology, along with the potential for progress at the political level stateside as midterm elections loom, can provide positive offsets to the risks that in the given moment may seem insurmountable.
The storms in Texas and Florida devastating as they are today are likely to provide at the local, regional, and national level a positive bump for the economy in the months ahead. Florida and Texas are states that have long histories of dealing with and recovering from the consequences of adverse weather.
Experience matters in such circumstances and both states have it in abundance, particularly when it comes to rebuilding after a severe storm.
Private sector and government entities are currently leading parallel and concerted efforts in responding to the challenges at hand while already beginning to look ahead at what needs to be done once the waters recede and the dangers pass.
Hurricanes, severe storms, and volatility in weather patterns are a fact of life in many parts of the country. The experiences gained dealing with storms such as Katrina and Sandy are likely to prove useful in responding to the challenges at hand.
Beyond the current emergency, response, and the massive cleanup, economic growth will likely follow.
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