Tuning out the noise (long-term perspective)

by: , Chief Investment Officer and Managing Director | IndexIQ

The noise to signal ratio continues to go up. Among tariffs, trade wars, immigration debates, the upcoming mid-term elections, and now a Supreme Court nomination battle: there’s a lot going on in the news, all against an economic backdrop of rising interest rates and a flattening yield curve. Still, it’s worth keeping in mind that somewhere behind the scenes, the global economy continues to grow, and the U.S. is a front runner.

Markets, however, often react according to the headlines, trading up or down depending on the day’s news. With that in mind, it’s worth remembering the old market aphorism, often attributed to Warren Buffet, “prices fluctuate more than value.” Whatever the source of that insight, Buffett wrote, in his 1994 Letter to Shareholders, “We will continue to ignore political and economic forecasts, which are expensive distractions for many investors and businessmen.”1

Of course, that may have been easier to do in 1994, prior to the explosive growth in the number of media outlets and the introduction of the ubiquitous, 24-hour news cycle. For investors, it’s always a healthy exercise to occasionally take a step outside the news bubble, and reflect on both the larger global trends and on their personal long-term goals.

What we see is that while political issues continue to dominate the headlines, the economy is mostly soldiering on. The U.S. is on course to grow in the 2%+ range, the somewhat disappointing first quarter Gross Domestic Product (GDP) numbers notwithstanding. The recent numbers indicated that 1Q growth was marked down to 2% from an earlier estimate of 2.2%, based in part on slower consumer spending. But there is good news, too: investment in computer software and Research & Development was stronger than initially thought, supported by the kind of capital commitment that tends to help long term economic and productivity growth. Estimates for 2Q GDP growth are still up there, ranging from 4.5% for the Federal Reserve Bank of Atlanta’s GDPNow model to north of 5% from Macroeconomic Advisors.2 U.S. unemployment remains historically low, providing additional support to consumer spending. The global outlook remains generally positive as well.

A favorite hedge for many economists over the last few years has been a reference to “exogenous events” – a fancy way of saying that things sometimes happen that can’t be predicted or controlled. But that’s hardly news. The fact is, it takes something pretty substantial to derail a $19 trillion economy.

Of course, that’s not to say that there aren’t developments worth watching. At the top of the list might be the Federal Reserve, which is committed to continuing to lift interest rates, with other central banks around the world likely to follow suit. Because the central bank policies that led to the recent extended period of ultra-low interest rates were unprecedented, the unwinding of those rates is also something new under the sun. Unlike much of the other short-term noise, this is worth tuning into. The possibility of a full-blown trade war is a legitimate concern.

It can be a confusing time to be an investor, but when is it not? Prices will fluctuate; as they always have. But, a sound investment strategy will look beyond the day’s news and allow investors to construct portfolios to meet their long-term goals.

1. Source: Investopedia.com, ‘Rules that Warren buffet lives by,’ as of May 2, 2018.
2. Source: WSJ.com, ‘U.S. Economy was weaker last quarter than we thought,’ June 28, 2018.

About Risk:

All investments are subject to market risk and will fluctuate in value. Alternative investments are speculative, entail substantial risk, and are not suitable for all clients. Alternative investments are intended for experienced and sophisticated investors who are willing to bear the high economic risks of the investment. Investments in absolute return strategies are not intended to outperform stocks and bonds during strong market rallies. Hedge funds and hedge fund of funds can be highly volatile, carry substantial fees, and involve complex tax structures. Investments in these types of funds involve a high degree of risk, including loss of entire capital. Treasurys are backed by the full faith and credit of the federal government, as to the timely payment of principal and interest.

The information and opinions contained herein are for general information use only. IndexIQ does not guarantee their accuracy or completeness, nor does IndexIQ assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report and are subject to change without notice. Past performance is no guarantee of future results.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs, and NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

1781485

Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

Full Bio

Leave a Reply

Your e-mail address will not be published.