As the old adage says, stocks like a good economy (investors are willing to take on more risk for the potential returns) and bonds like a bad economy (investors shift to safer investments like bonds). So, where are we?
The US stock markets have experienced large gains since the presidential election. Before we get too excited and make emotional decisions, let's review a few things…
- What is “soft” vs “hard” data? Think of “soft” data as those things related to emotions, sentiment, political hope, and trends (remember, past performance doesn’t necessarily represent the future); whereas “hard” data represents actual results and measurements, such as GDP growth, corporate earnings, interest rates, etc.
- What has occurred since the elections? For sure, there has been a lot of optimism (“soft” data) about the economy. However, there hasn’t been any significant change (“hard” data) in economic results. The results likely won’t occur until there is actual economic reform through passed legislation. Unfortunately, we know all-to-well how ineffective government can be in passing meaningful and timely legislation. Until reform is enacted, the economy likely will continue to have tepid growth.
- On the “hard” data side, the Federal Reserve raised interest rates in anticipation of an improving economy. While I won’t pretend to be an economist or know what the Fed Board members are thinking, it’s seems likely that they recognize that keeping interest rates too low is not advantageous and this is a good time and opportunity to raise them.
- Bond investors are skeptical about GDP growth and corporate earnings that have yet to show any significant improvement from the past several years, rising debt levels, and aging demographics – which are “hard” data points.
Circling back to the original question of “where are we?”, we’re probably somewhere in the middle with both sides having merit. We will get a clearer view as more “hard” data information is presented over the next few months. In the meantime, remember that at Sherpa, we invest by diversifying through stocks, bonds and alternative assets (which are not correlated with stock market fluctuation). We also try to partner with quality investment companies, manage to a client’s risk level, and position for long-term results derived from “hard” data instead of short-term movements from “soft” data.
This information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. There is no guarantee that any opinion or suggested possibility will happen.
There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values.