Crazy year, calm markets. Here’s why that isn’t a quandary
What a year! Pretend we’re back at New Year’s Eve 2016. If I told you everything that would happen in 2017, would you have guessed world and UK stocks would be up 11 months into 2017 by 10.2% and 6.4%, respectively? After all, here is just some of what we lived through:
North Korea successfully tested a bunch of long-range ballistic missiles and a hydrogen bomb.
Terrorists struck Britain three times in just weeks.
They struck Barcelona, too.
Multiple mass shootings in America killed hundreds.
American hurricanes and floods wiped out over $200 billion in property.
Storms flooded Britain and Ireland, too, with damage still being tallied.
Fires also destroyed billions in Spain, Portugal and America’s west.
Theresa May called a snap election to strengthen her hand-and ended up losing her majority.
Spain’s government had to remove Catalonian leaders after an illegal independence bid.
US President Trump abandoned one free-trade deal and threatened to rip up two others, while he failed to deliver any material pre-growth policy shifts (and sparred with numerous world leaders on Twitter, including May).
UK inflation jumped to 3% y/y, while real wages fell.
The BoE hiked short rates once, the Fed hiked twice, and the ECB tapered its quantitative easing.
Again, that’s just a sample-plenty other scary stories had their time in the limelight. Investors dealt with a cacophony of noise in 2017.
Yet stocks weren’t fazed. The bull market marched on. The stronger pound dampened Brits’ returns on foreign stocks (see my 19 September column), but even in sterling, world stocks didn’t suffer a correction (short, sharp, sentiment-driven drop of 10% or worse) or other large pullback.
Volatility was low worldwide, just about any way you measure it. In dollars, US stocks rose every month this year. In sterling, world stocks fell 1% or more on only 12 days – below average – and never breached -2% on a single day. Crazy calm!
Some call this calm rise complacency. Yet it seems rational to me. What do all these events have in common? None have the power to chop a couple trillion pounds off global GDP – as is necessary to render recession worldwide. Nor are any all that different from what markets deal with every year.
There is never a dull moment in life or markets. Headlines are always full of bad news, some of it seemingly catastrophic. In this bull market alone, we’ve seen dozens of terror attacks, several wars, Ebola, Brexit, wild elections or coups on every continent, major earthquakes in Japan and Mexico, the refugee crisis, Europe’s sovereign debt crisis, an oil crash and so much more. But world stocks are still up 273.5% since the bull began on March 6, 2009.
Markets have one job: To discount widely known information and price securities accordingly. That’s it!
They considered all these events and more. If you hear it or read it, chances are markets are aware of it. They already took it in, mulled it over and decided stocks are worth what they’re worth. Most often, they’re right. Yes, in the short term, they can be darned irrational. But longer term, they weigh reality beautifully. They’ve weighed it all year. Trust it.
I’m not arguing none of what happened this year matters. Elections and policy choices carry weight. Lost lives and damaged property – by nature or mankind – are tragic. But investors mustn’t let emotion influence buy and sell decisions. Not fear, anger, greed or anything else. Emotion is the root of all errors-it’s what makes people buy high and sell low repeatedly.
Unlike people, stocks are callous and cold. They care most about what is probable over the next 3-30 months or so. Not what just happened. Not what might happen. Just what will probably happen.
As I see it, what probably happens looking forward is this: The world economy grows while politicians do little and investors get more optimistic. Leading Economic Indexes worldwide are high and rising. Aside from a German hiccup and pending election in Italy, European political uncertainty is down – and should clear further as Germany and Italy resolve. The global yield curve is steep enough to keep credit flowing.
Meanwhile, gripes about complacency show sentiment has much room to thaw, particularly toward Europe and Asia.
Remember this next year, as the world inevitably endures more sociological bumps and bruises. History never stops. But neither do markets. Here are two stocks for your year-end shopping list.
Bullish on oil? I don’t think you should be right now, but if you were, you’d buy an oil company. Bullish on the stockmarket? Buy a stockmarket company. In other words, buy a huge, diversified asset management firm like BlackRock (BLK) or large asset custody and administration firm like State Street (STT).
Their business models are simple: They charge a percentage fee on assets under management (AUM) or assets under custody. The very best drive AUM higher via organic means, but it’s a fiercely competitive market and hard to do so.
Growth from a rising stockmarket comes much easier. If the markets rise 5%, 10%, or 20%+, all things equal, AUM rises similarly-driving revenues and the firm’s stock price.
BlackRock is pricier than peers at 20 times my 2018 earnings outlook, but when a roaring bull market can easily make earnings rise 10-20% in a single year, you’ll be happy you paid the price. And State Street is just darn cheap at 14 times my 2018 earnings outlook.
Ken Fisher has been regularly featured in the financial media for over 30 years and was the pioneer of the Price-to-Sales ratio as a tool for investment analysis. Since 1979, Fisher Investments and its subsidiaries have provided customised guidance to institutional and individual investors. For more information on Ken Fisher and Fisher Investments UK please visit www.fisherinvestments.com/en-gb.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.