First Coast Financial Beacon June 2016

Written by Chris Draughon

I want to see you achieve your financial goals so I spend my time making the complicated things simple. As the Director of Financial Planning I help our clients identify their most important financial goals and develop paths to get them there on time with room to spare.

June 1, 2016

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Make Way for the Super Tanker

Hard to believe May has come and gone, and we’re already in the throes of Florida’s humid weather.  While the summer usually brings a focus on cookouts and vacations, this one might be a bit different. For one, we’ve got a contentious Presidential election coming up in a few months. Also, the UK is set to vote in June on whether to remain in the Euro Zone or go it alone. And, as usual, the Fed’s interest rate policy is back front-and-center.   All these events have uncertainty attached to them, and markets generally don’t like uncertainty. As a result, there’s much chatter around the prospects for greater fluctuation in global and domestic investment arenas in coming months.

In the interest of helping readers take stock, make some sense of all this, and (above all) behave properly, here’s a nice healthy dose of perspective for your summer reading.

First off, the investment markets are priced based on investor’s perception of the markets worth. Take Apple stock, for instance. It presently trades at around $94 per share. So, global investors have all gotten together and decided that – as of today – this represents the fair market value of Apple as a company today. With us so far? Good.

Now, it’s generally accepted that markets are fairly “efficient” (accurate) at pricing the value of companies, but only in the longer run.  In the short run, the pricing of markets and investments is not very efficient at all. Let us give you an example.

In the first three weeks of 2016, the US stock market (as measured by the S&P 500 – the 500 largest companies in the US) declined by about -11%. Now, a question: Does anyone really believe that the 500 largest companies in the US actually saw their true enterprise value decline by 11% in three short weeks? Of course not. In the short run, markets tend to overreact both positively and negatively to the true value of investments. But over longer periods of time, the markets tend to get it right.

So, rather than focusing on the short term fluctuations, wise investors are better off assessing the long term prospects for investment growth, which means assessing the health of the domestic and global economy. (If economies are healthy and expanding, the companies that make up the economy should be healthy and expanding too.) So let’s take look at the health of the economy.

We’ve all heard from the talking heads that this is a “no growth, no job” economy.  How then, do we explain the following chart reflecting private job openings in the US?

Total and Private Jobs

You’ll note that the number of private employers looking for workers hasn’t been this high since before 9/11.  And “no growth” should be revised to “slow growth”. It’s true the economy is expanding at a slower pace than we’d like – but it is expanding. In addition, wages are finally growing again. With higher wage growth and low energy costs, American families have more money to spend – and they are spending it. On cars, travel, and (at least at our houses) Amazon Prime.

And what about corporate earnings? Yes it’s true that total corporate earnings growth has declined, but energy companies make up a large chunk of this. Excluding energy companies, corporate earnings are at record highs. So, companies that make up the economy are healthy, employment is robust, and wages are growing. That doesn’t sound like doom and gloom to us.

We happen to know a fellow who’s the captain on an oil super-tanker. He tells us that, when he arrives at a port with a full load of crude, he must run his engines in full reverse for a mile to bring the behemoth to a full stop. We liken the US economy to a super tanker. It doesn’t turn on a dime. So while short term events like elections, Britain’s saber-rattling, and the Fed’s not-so-secret expectations for interest rates may cause short term fluctuations (both up and down) in investment values, we would encourage readers to instead keep their eye on the broader picture of economic health.

 

See you next month,

Your First Coast Wealth Advisors Team