Tuning out the noise (long-term perspective)
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.
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