New Walls of Worry
"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves"
- Peter Lynch
There's a lot of old "Wall Street" sayings or aphorisms. My 29 years in the industry have taught me the 100+ years of distilled wisdom these old adages embody makes them worthy of our consideration. One of my favorites is this: "Markets Climb a Wall of Worry".
Current Walls
As I look back over the years I have worked with clients there have been significant things to be concerned with every year - and most of the time we have multiple important concurrent reasons to fret. Sources of angst vary by person, but broad categories include geopolitics, valuations, debt and deficits, upcoming elections, inflation, etc...
The current worries I hear from clients and prospects include the following:
Elections:
We currently have two polarizing candidates for presidential office that are uniquely unpopular – both with the opposition as well as their own party. In my 50 years of being aware of presidential elections I don’t think there’s been another national election with so much angst and antipathy. Each side genuinely believes the country as we have known it will cease to exist if the candidate they loathe is elected. Social media only compounds the problem. Thank goodness for wise founders who created three branches of government with power diffused amongst the three branches.
Debt and Deficits:
The United States is currently sitting on north of $34 Trillion dollars of debt. That’s equal to about 100k per every man, woman and child in the country. The reality is that we cannot afford the debt service (interest) on this debt so we continue to issue new debt to pay for the old debt plus the interest payments. Eventually this leads to financial spot for the country which is not sustainable – the question to that is when. Interest rates going up make the problem far worse. We need some adults who are more concerned about the rising generation than re-election to fix this problem.
Valuations:
Current equity market valuations have some people nervous. They are on the higher end of market history although not in the territory of bubble valuations from the late 90’s yet. The market is also extremely narrow. What I mean by this is that a very small subset of the market has generated almost all the gains – with international, emerging markets and most value stocks very reasonably priced. We also have much higher interest rates - which makes higher valuations less sustainable for the narrow subset of mega-cap tech companies which are currently driving the S&P 500 to new highs.
Yield Curve:
This is a somewhat esoteric concern. The yield curve is a description of how interest rates are generally higher the longer the maturity. Currently the yield for a ten-year treasury is significantly lower than short maturity (1 year or less) treasury securities. It’s been this way for a couple of years now – and while historically an inversion has been a good predictor of recessions – it has not yet been a recession indicator this go around.
Geo-Politics:
There is a lot going on in the world right now! Saber-rattling from China and North Korea, a war between Israel/Hamas and a war between Russia and Ukraine are the backdrop to a chaotic world landscape. In addition, Houthi rebels with Iranian firepower have somehow managed to disrupt world shipping without a strong response from the developed world. My concern is that these will continue to worsen and aggravate not only the geopolitics in the region, but the re-routing of shipping lanes worldwide will have a negative affect on both supply chains and inflation…
Finally: It's important to remember it’s impossible to predict what markets will do next – even if we had a crystal ball on world events! Markets frequently move different directions than the economy. Rather than trying to predict something that is unpredictable, focus on living and let your basket of global capitalism grow significantly but erratically in the next 10, 20, 30+ years