August 2006
Call me a bit anti-social or just a little odd, but I'm not all that comfortable in crowds. And this doesn't just apply to my physical world but my emotional one as well. I know that my tendency to cringe when I agree with the consensus view is probably helpful when it comes to making investment decisions, but that still doesn't make me comfortable with it. In some ways, this article is my attempt to rationalize my current discomfort, and by the end, I am sure I'll feel better about things. So here it goes.
On the face of it, today's prevailing market sentiment is downtrodden. We certainly read and listen to more than a few relatively informed people express their worry of an economic slowdown just on the horizon. Okay, that is the surface-level consensus view. Having just written that, I'm actually cringing a little right now. But before things get too uncomfortable for me, it makes sense to dig below the surface to see if I need to be feeling like a lemming.
Despite the outward and near unanimous worries about the economy, we also know that investors out there haven't really felt that much pain in their portfolios. While things have been somewhat more volatile lately, if investors were really worried enough, wouldn't the broad stock market indexes be down this year? They aren't and that has to make you wonder.
Could it be that the majority are worrying and just taking little action? Or is it possible that investors are saying what they think is the right answer without actually believing it themselves? To get a better handle of what is going on it might be helpful to understand exactly what the deeper consensus view really is out there?
Basically, the following is what we see are the main talking points of the self-proclaimed, stock market geniuses on stations like CNBC and the well-read investment novices alike;
(1) After a three year recovery since 2003, the U.S. economy is headed for a slowdown. It is actually kind of tough to find someone who would thoughtfully argue with that statement.
(2) Many also agree that it is likely to be only a moderate slowdown and the main credit for this "soft-landing" is largely due to the Federal Reserve's uncanny ability to steer this huge ship so deftly. How do they do it? Their answer is "We don't exactly know and frankly, we don't really care as along as they get it done!"
(3) It is mentioned again and again that the stock market is as much of a bargain as it has been in a decade and despite an imminent slowdown, well-established companies are going to keep growing their earnings at 10%-12% into next year. In other words, at today's prices, investors don't see this market as a replay of the 1996-2000 tech bubble. And since they all agree that's a good thing, they all agree to feel more optimistic about things today and just move on to new topics of conversation.
(4) Just when the US consumer is starting to slow, the wise stewards of Corporate America will decide to finally begin investing their growing "hoards of unused financial resources". This business spending and investment will create higher paying jobs and spur economic activity at just the right time. We wonder, with the consumer slowing, what exactly is their incentive to start investing their cash piles? But let's not worry about those details!
(5) This controlled slowdown thankfully comes at an opportune time since the developed economies of Europe and Japan are just gaining strength. Additionally, China and India and the many Asia-Pacific emerging markets are growing quickly and they are on their way to giving US companies the ultimate gift of billions of new global consumers for our products.
I feel that the Big Five points above are the primary pillars of the mainstream consensus view today. The consensus view really does go far beyond simply saying that a US economic slowdown is on the horizon.
To be fair, there is certainly an alternative Big Five list that counters the above consensus pretty effectively. But for the purpose of this thought exercise, those points don't really matter right now. I am already starting to feel a bit more on the outside of the crowd.
Worrying is only half the battle. Action is necessary when it is really necessary. Today, looking forward over the next 6 to 12 months, we see things playing out differently and have positioned ourselves accordingly.
There is so much money (very important money that is truly needed to successfully fund soon-to-be announced retirements among other things) that is being managed today in an almost passive way. I don't mean the old "index funds versus actively managed funds" debate. I mean money that is basically placed on autopilot with a locked in view of "Everything will work out and there is no sense trying to do anything out of the ordinary now!"
In our view, today is the time to try to thoughtfully do something about it in case the rosy consensus doesn't play out as neatly planned. It only makes sense to not simply look at what can happen when things go right but to understand the deeper consequences of things when it goes against you.
As a closing thought, I know this was probably articulated better by someone out there, but I really believe that it isn't the actual outcome of a decision that makes it right or wrong but the process under which the decision was made. In a good way, the process anchors you to a position despite the prevailing consensus view. See, I've succeeded in feeling like I'm a bit of an outsider again!
Jason P. Tank, CFA
jason@frontstreet.com