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Everything Matters

Monday, August 26, 2019

by Rich and Sheila Jamison

Our investment process recognizes that “stuff happens.” More important from our viewpoint, the process identifies adjustments for that “stuff” if they’re needed. Why report these critical aspects today, you ask? The “Stuff” happening recently appears to be growing in both quantity and frequency.

Last week’s escalation of the trade dispute quickly followed discussions on the Fed’s next interest rate move. Intense interest in the Fed’s plans came on the heels of the inverted yield curve. The precarious interwoven nature of these events – and many others not even making last week’s headlines – warrants we take a closer look.

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Right now, the US economy is humming along. Although it’s not as strong as a year ago, we’re well ahead of the rest of the world. So what’s the concern? Although much “stuff” may seem like isolated, unrelated events, they are in reality bound together. That is, though our economy is running as if other world economies don’t matter, our economy is not an isolated thing.

This isn’t new information. It’s just something you probably haven’t thought about as you’ve gone about your day-to-day living … perhaps not even since high school economics class. When, for example, was the last time you thought to yourself, what problem can I solve by using algebra today?

Let’s take a look together at why everything matters. Simply put, because each part of everything connects to each other part in a system, some directly tied and others less obviously so. We can appreciate this this from a birds-eye view without having to ‘deep dive’ into the details. This affords an “above the fray” view that works regardless of individual opinions about any of the events involved.

Some part or parts of the system are almost always in motion. The system absorbs the changes, maintaining an ever-shifting harmony. For example, after the market closed on Friday, President Trump tweeted his retaliation to China’s retaliation. He announced increasing the previously announced rates for our upcoming tariffs on Chinese goods, the ones that had provoked China’s Friday morning retaliation. (Yes, we’re retaliating to their retaliation to … you may now imagine you hear, “Will It Go Round in Circles?” – Billy Preston’s 70’s hit – playing somewhere. We did.)

How the system absorbs new information doesn’t lie in the connections between the parts. Changes lie in each component part’s details.

Rather than resort to the dubious “intuitively obvious” explanation proffered by math textbooks, here’s an easy way to think of all this. Begin with a look at one of Alexander Calder’s mobiles* (aha. That's why it's above.) The parts are suspended from a wire in an ever-shifting harmony.

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If piece A is disturbed (by a breeze, a nudge or a change to its weight), B adjusts despite its seeming remoteness from A. All the other pieces also adjust, some more noticeably, some almost imperceptibly, and by greater or lesser amounts.

How does this apply to news events et al? Think of the inverted yield curve, global economies, trade challenges, inflation, labor markets, productivity, potential recession, geopolitical events and all the rest of them. Now attach each of these to one of the suspended mobile pieces. You’ll have to imagine more pieces in the mobile to capture all the events that come to mind. Be sure to include pieces for the financial markets – one for stocks, another for bonds, one for commodities, and so on – and another for your portfolio. You might even add some spare pieces for things that aren’t obvious now.

Once done, the mobile becomes a model for the world’s events, particularly for its economy because we populated it predominantly with economic pieces. We suspect Calder might have given it up at this point, feeling it was too complicated to keep that many parts in an ever-shifting harmony. The system handles it however, usually all by itself, sometimes with a nudge here and there.

Let’s return to A in the picture. Let A represent our tariffs on Chinese goods. Let’s assign the red disk right next to A as Chinese tariffs on our goods. Move either one (or both), step back and watch the rest of the mobile. It’s instantly apparent A and/or B move all the rest; each affects the rest of the “world” parts. As the tariff pieces move, so do the ones for interest rates, jobs, global growth, exchange rates, the markets, the Australian economy, gasoline prices … well, you get it. The key is to avoid ‘nudging’ too much; to stop before reaching a tipping point that move the ever-shifting harmony into disharmony.

Movement in the system is what the market watches. How it reacts to what it detects (and some herding behavior) sometimes creates (often self-correcting) overreactions. Our challenge is to keep our portfolio investment ‘piece’ comfortably situated in the mobile. Many times, it will wind up in acceptable new position all on its own without intervention. On occasion, we need to modify it.

Your likely reactions are, a) intellectually, “That’s logical, even obvious” … then b) your gut chimes in, “But how?” Next come, “Predictions are useless. Many of them go very wrong” … and reflexively, “So what do I do now?”

First, steel yourself against headlines. Be interested in but unpersuaded by them. Headlines are designed to grab your emotions and worry you. Good news does not make headlines that capture more eyeballs and advertising revenue. Remember that emotions generally do not lead to good decisions, financially or otherwise. So turn off the television, or change the channel to a movie, a cooking show or even a talk show about penguin farming. Put your emotions to rest before you encounter the negatives of emotional decision making inadvertently.

Next, pay attention to what the market is doing instead of what the pundits think it will do. No one/nothing can predict the market’s next moves reliably. While past performance can’t guarantee future results, historically the market has shown/told us the “what to dos” and the “when to do them” that were likely to have led to desired outcomes. Whipsaw days and increasing volatility make it harder to find the signals underneath the increased noise. Trust that they are there. Price has been king, and technical analysis is founded on price. Pay close attention to what the technicals reveal.

We’re watching and listening to the market’s technical signals for you, frequently and diligently. As always, we are happy to discuss any specific concerns you have with you. A gentle reminder here, “We’ve always got time for you.” is a long-standing core principle of the Jamison Financial Group.

* Blue and Yellow Among Reds, 1964, Alexander Calder, lettering added. No mobiles were harmed in the making of this graphic.

 


Sources:
The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; BBC News; The Associated Press; Reuters.com; Crain’s New York Business; MFS research; NYSE; NASDAQ; Dorsey-Wright Associates; NYMEX.com; CNBC’s Power Lunch & Squawk Box programs; Investing.com; Markit.com; the New York Times; Standardandpoors.com; Djindexes.com; MarketWatch.com; Morningstar.com; Thomsonreuters.com; the Financial Times.com; Briefing.com; BusinessWeek.com; Dol.gov; Fxstreet.com; Streetinsider.com; Ycharts.com;
 
The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

 

© 2019 Jamison Financial Group. Please feel free to distribute copies to individuals you feel may benefit from the information presented. Commercial use is prohibited.