Does the news give you everything you need to know?
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
Sometimes it is hard to see the trees because of the forest. It is even harder when the view is constrained by a smaller view. As my family and I were walking through Sequoia’s Giant Forest, that was the thought behind this picture. I was thinking about how difficult it can be to get a good picture when we have a constrained view.
It is an accurate depiction of how investors see markets. It is always framed with hopes, fears and the constant bombardment of the news and what it is trying to convince you is the truth. If that is all we had to look at, we would be hard pressed to make sense of the small snapshot of what the information is really telling us.
There are big things and there are small things that we can examine. Many people do not want to take the time or expend the effort to do this and they miss a lot. I occasionally get teased by my kids about my propensity to take photos on our outings because it slows down “progress.” However, without fail, they all want to examine the photos later.
Often, they are right and it isn’t a great photo, but every once in a while they get to see something they would have otherwise missed. Here is one example of that: I was taking pictures of wild flowers in a meadow, but there was so much more to see and most people miss it.
What does this have to do with investment commentary? Often the framed picture the news portrays isn’t the detail that helps craft sound investment strategy. When you see only the snapshot the news wants to give, you miss all the really good stuff that is out there.
Markets are at all-time highs, and some investors are tempted to head for the hills and protect the gains they have. After all, 2017 has been pretty great so far. They are framing their decision on the feelings that are created by a growing number of pundits telling investors all the reasons why the market is on the brink of ruin. Others, many who have been sitting on the sidelines too long already, are regretting holding off investing and feel so much regret they want to rush into the market. They are often framing their decision on headlines that talk about the amazing run the market is on and the nearly daily new highs. What is an investor to do?
I like the details. I like the small things that are going on which tell the story of what the economy may do next, examine its health, look at the supply potential and risks and assess what could likely happen next based on history, mathematics and trends.
The big picture, from a sentiment standpoint, is strong. Here is a graph that shows the long-term trend of the Dow Jones. The top quartile is the index. The second measures a 20% swing. The third measures swings of 5% or greater and the fourth measures 1% swings or more. This is done weekly on a rolling basis. So far, we have primary, secondary and tertiary swings all indicating that trend is up.
We don’t like to go against the secondary trend unless some of the other details we look at are breaking down – which, at this point, they aren’t. However, the fundamentals of the market are getting stretched and there is no argument against that fact. If we just look at the most recent P/E ratios, we can easily see we are overvalued. The following chart from Ned Davis Research clearly has the market in an “overvalued” status.
Photos courtesy of Ben Bimson
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