• Apocalyptic scenarios abound, but investors who have defaulted to optimism historically have been rewarded.
• A number of things have been going right recently.
• Pay more attention to Buffet than politicians.
In the world of investing, apocalyptic scenarios abound. You can fit the extreme optimists in a thimble. We sit somewhere in the middle—having had a neutral rating on U.S. stocks since the beginning of 2015. It’s certainly more adrenaline-inducing to have a high-conviction extreme view, but investing is typically more gray than it is black or white. But admit it—you are often more intrigued by the apocalyptic scenario. More ink is spilled on it, it often sounds “smarter,” and it reads more like a suspense novel; albeit the end of a suspense novel. I read an interesting article recently by Fear & Greed Trader in which it noted (emphasis mine):
“To the pessimist, a bad event or the simple prospect of one occurring is the end of the story. To the optimist it’s just another chapter in an ongoing novel. The difference between an optimist and a pessimist often comes down to endurance and time frame. Pessimism is intriguing to most because their messages require action. An investor has to do something when they take up the pessimistic approach. On the other hand, optimism means for the most part ‘staying the course.’ Pessimism is ‘SELL, it’s another 2008,’ which grabs your attention because it’s an action you need to take right now. Optimism is mostly, ‘make adjustments as necessary, stay the course,’ which is easy to ignore since it doesn’t require doing anything. Optimism sounds like a sales pitch; most people hate sales pitches. While pessimism sounds like someone trying to help you, with the incessant dire ‘warnings’ of what may come to pass.”
Optimism as default strategy
I have always agreed with the notion set forth in that article that defaulting to optimism is the best strategy longer-term when it comes to investing and creating wealth over the long haul. In addition, one of my long-held mantras is that I’m always more intrigued with the story no one is telling than with the story everyone is telling. I am well-aware of the risks to the market which remain ample. We expect continued bouts of volatility and greater frequency of corrections. But the glass is not empty. The story almost no one is telling is that the glass is at least half full.
With that as background, it’s time to look at what’s been going right in the market recently.
Over the past year, the market has been characterized by frantic bouts of risk-aversion and a dramatic spike in cross-asset correlations (making investors question the merits of diversification). Based on how a broad array of asset classes performed, 2015 was the most difficult year since 1937 for investors to make money, given that not a single major asset class had double-digit returns last year.
But here is a top-10 list of signs that the landscape may be improving:
1. The S&P 500 is back above its 50-day moving average; and an increasing number of stocks are trading above their 200-day moving averages.
Good Times Bad Times ... And Lots In Between
March 3, 2016