Mike Lipper’s Monday Morning Musings
Investment Time Horizon Should Pick
How You Measure the Results
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
Current Situation
Billions of people invest directly or indirectly in US
securities markets, with each having somewhat different motivations and
thoughts about what they are doing. Since we don’t know these people and the
way they think, we simply group them into buckets. I have found the intended
investment period often defines how they invest and for what period.
My outlook is of someone who has served families and
institutions, and I tend to think long-term for them. As most money invested in
mutual funds is largely for retirement and most institutions are designed to
pay out their assets over an extended period of many years, they too have a long-term
time horizon. (Unfortunately, this focus on the long term does not come with a
knowledge of what the future will bring in terms of risks and rewards.)
The media concentrates on “news” and fills space with the current
chatter about the present and the next expected announcement of note. Most
security salespeople and money managers believe potential investors are
primarily interested in the present and that is the focus of their sales
pitches.
These two different focuses have led to two very different
market structures. The hyper action-oriented players dwell on any market
development that leads to a move in stock prices. They celebrate the percentage
gains of interim results and prognostications. Those who use securities to meet
future payments are concerned about anything that might reduce these payments
in terms of future purchasing power. A possible tell-tale signal of a threat is
the sale of securities by supposedly knowledgeable investors.
This is the tug of war between those seeking near-terms
rewards and those worrying about the loss of worth of some future payment. To
satisfy both camps the stock exchanges publish the volume of shares sold at
higher and lower prices and the number of issues which rose and fell each
trading day.
In the latest week there were only four trading days and one
of those was half a day. On the last day the volume of shares traded on the NYSE
was down by approximately 2/3rds and by approximately one half on the NASDAQ*.
(In the current market environment, I pay more attention to the NASDAQ, as it
has risen the most this year due to having more “Tech” companies, whose stock
prices are more volatile than those on “The Big Board”. On Monday the 4
indicators were larger for the NASDAQ and on Tuesday the NYSE saw better
results. This see-saw pattern has occurred frequently throughout the year.) For
the week, 65 % of NASDAQ stocks rose in price vs 61% for the NYSE.
*Client and personal accounts own shares in NASDAQ.
In terms of looking at the future there were two interesting
notices. The Conference Board Consumer Sentiment Survey was 89.1% vs 92.9% the prior
month. The American Association of Individual Investors (AAII) saw a drop in bullish
sentiment for the next six months in their sample survey, dropping to 37.4%
from 44.1% the prior week.
Understanding the Measure
Most of the chatter about this change focused on the
percentage change from the period immediately prior. However, there is another
way to look at the results, the way an actuary would in determining the chance of
a certain event happening. This is done by reviewing the entire history of the statistical
sample, including any possible period where that event could reappear and at what
frequency. For example, one chance out of fifty years, or every 84 months, or
something similar. History traced through geological discoveries has recorded
cycles of expansions and contractions with some regularity. It is much easier
with regular barter or the development of money.
Said simply, when there is a shortage of supply over the
level of demand, prices go up. When there is more supply than demand, prices
drop. Climate also impacts agriculture, as does the effort of humans. The
supply of money was a recent concern, which has more recently shifted to concerns
about the supply of credit and certain natural resources. In all cases, it is
the imbalance of critical items which moves prices to a point of excess, which
causes a reversal.
Small reversals happen more frequently than large ones, often
occurring within a single presidential term. However, small reversals periodically
stretch over two or conceivably three terms. In trying to avoid or stop small
declines, the application of well-meaning changes can trigger bigger declines, which
we label depressions.
Addressing the economic hardships caused by the cost of fighting
WWI led to an extended period of debt expansion, which initially hurt the
farming communities. This led to the application of tariffs to protect small
banks which extended loans to over expanded farmers and farm equipment dealers
in critically important mid-western senate seats. Simultaneously, the public
became enamored with the use of credit in an already highly priced stock market.
The market crash of 1929 caused many people to lose money in
margin accounts, along with many of their brokers. The market reached a bottom
in 1931, but people were scared by what had happened. In 1932 they elected FDR
as President as a protector of the banks, and he closed all the banks in 1933 in
an attempt to restructure society. Even though FDR lost most of his battles
with the Constitution and the Courts, he initiated various government agencies
that mismanaged the economy until we entered WWII, which he helped start in
both the Pacific and Atlantic. The US recovered slowly after the war and subsequent
Korean Conflict, although some stocks listed on the NYSE did not reach their
1929 highs until the mid-1960s with the discounted dollar.
Semi Parallels Today
There has been an expansion of debt both at the federal and
individual level, with bankruptcies currently rising. At the same time, prudent
constraints on the financial community have been reduced or eliminated. Additionally,
we have an underequipped military, including Navy, Air, Space, and Coast Guard not
ready for a multi-front war.
Conclusion:
We don’t know when the next decline will happen, or if the depth
of the decline will morph into a depression. However, we should resist being fully
exposed to rising gains in the non-public market while we experience a stagnant
private economy. It is possible gains achieved in 2026 may be expensive in the
long run, so be careful.
Did you miss my blog last week? Click here to read.
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Lipper's Blog: On The Way To Casualties & Eventually Riches - Weekly Blog #
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