Notes on the Week Ahead

“We just came for one thing, too”.

Sari and I were meandering toward the checkout in a crowded Costco on Saturday morning and I was reflecting out loud on our accumulation of a substantial and diverse pile of goods, although we had come to buy just one thing. But we were not in the same league as the woman who’d overheard me. She may have come for just one thing too, but the lower rack of her cart was loaded, the little area at the front for babies or purses was full and the main body of the cart was stacked so high above her line of sight that her daughter was helping direct the vehicle to a checkout lane. Clearly the next innovation in cart design needs to be the installation of a periscope.

Investors in the week ahead will likely be most focused on the aftermath of the terrible attacks in Israel over the weekend. The consequences of this violence are, of course, first and foremost a human tragedy for all the families affected and they are in our prayers at this time. However, an initial rise in the dollar and oil prices in response to these attacks serves as a reminder of the potential for conflict in the Middle East to impact the global economy and investors will need to keep a close eye both on the evolution of the conflict and its economic implications.

In an idealized world of medical practice, you would go to the doctor, describe a few symptoms, undergo a few tests and then listen carefully to the doctor’s diagnosis, prognosis and prescription. The diagnosis might well be due to something entirely out of your control and the prescription would often be a pharmaceutical. However, very frequently, the prescription would be in the form of advice on life-style changes. In an idealized world, you would take that advice and implement it.

To tell the truth, I haven’t done much hiking up mountains recently.  I did scale a few minor peaks, years ago, when our sons were in boy scouts.  However, it was always hot weather heading up and, between separating those young gentlemen who decided to fashion light sabers from tree branches and attempting to corral those whose first instinct was to chase into the woods after squirrels, it was a somewhat trying business.  The reward, for all, of course, was the view from the top and it was always breathtaking.  However, as you stood on the summit, things would cool off pretty dramatically and you had the sober knowledge that safely descending from the top is always a trickier proposition than getting there.

My father worried out loud, broadcasting his concern about a wide range of issues, ranging from the suspicious surplus of toothbrushes in the upstairs bathroom and his children’s acquisition of strange accents to declining standards in public education and the ominous state of the government’s finances.  My mother fretted more quietly, sparing her vocal chords at the expense of her sleep. 

 

Finally, traditional indicators also may be missing the mark in predicting persistent inflation.  In particular, in the June Summary of Economic Projections, most members of the Federal Reserve’s Federal Open Market Committee in effect professed that an unemployment rate of 4% or higher was necessary to attain the Fed’s long-term objective of 2% inflation.  However, the unemployment rate has now been below 4% for 21 straight months and, yet, since March of last year, year-over-year wage growth has drifted down from a peak of 5.9% to 4.3% last month. 

For almost 60 years, the British journalist and New York resident, Alistair Cooke, recorded a weekly, 15-minute radio commentary entitled Letter from America. As a teenager, I would listen to it, late at night, on the BBC World Service. Cooke had a beautiful speaking voice and a remarkable way with words, as he painted landscapes of American culture and portraits of America’s personalities. Letter from America made me feel well-acquainted with this country long before I arrived here. Cooke, of course, had strong opinions based on his own observations. However, he also had a quality of balance – he was not one to be swept up in the latest national obsession but, rather, spoke of his world in a measured way.

The only real drawback to my job is the number of flights I have to take - but this is a serious drawback when evening flights get delayed. Without the energy to do any productive work, I often combat the misery by playing board games on my iPad and I’ve lately added Monopoly to my repertoire.  I used to play Monopoly as a child, of course, but my strategy has evolved with the years. When I was younger, I hated owning boring railroads.  Now I quite like them.  They’ll never provide with the fortune you can extract from a guest at your Boardwalk hotel.  But if you own all four of them, they generate a nice steady income and sooner or later, someone will pick up the Chance card that triggers the minor windfall of double rent.

To be good long term investor, you need courage and you need brains.  However, you need them in different quantities at different times.  In the depths of a bear market, you mostly need courage since it’s almost a “no-brainer” that the economy will recover and will lift financial assets with it.  In a bull market, its mostly about brains since, while people are less haunted by economic fears, valuations are higher, increasing the need to be more discriminating in both asset allocation and security selection.

As the calendar flips to August this week, consumers, workers, investors and the Federal Reserve all have reason to be pleased with recent data. Stock market returns have been strong all year, economic growth has been surprisingly resilient, unemployment remains very low and, despite all of this, inflation has fallen sharply. The Fed continues to tighten in a manner that appears aggressive given the balance of risks. However, so far, this does not appear to have inflicted too much damage on the overall economy or markets. So where do we go from here? One approach to this question is just to review an economic checklist of Growth, Jobs, Inflation, Profits and Rates.