While it may not seem like it, the S&P 500 (S&P Indices:.INX) has risen ~14% from the Dec 31, 2011 close. The high during this period occurred in September 2012 at $1474.51 according to data from Thompson Reuters. The chart below shows S&P 500 (S&P Indices:.INX) formatted for the Monthly High Low and Closing Prices as published by Thompson Reuters.
From what I can tell, within the majority of advice provided by the many who have been featured in the media the past 4yrs, there is no one who has correctly predicted the market’s minor or major turns since the lows in late 2008 and early 2009. Look back and saying that “I could of…” or “ I should of…” makes it appear far simpler than it really is. The difficulty in predicting markets is embedded in the wide spread belief that investor and consumer sentiment drives markets which in turn drive the economy. The body of data which has only recently become readily accessible through the St. Louis Federal Reserve FRED site lets one test the many assumptions which are prevalent in investor thinking. Low and behold, when one carefully compares the many economic data series for support of the existing methodologies so frequently repeated one finds little correlation. What one does find is not a series of multiple short term relationships with which active investors must trade, but something far simpler, longer term and dominant which can only be captured through a patient and carefully crafted approach.
What one finds is that it is the economy which drives not only markets but investor sentiment in spite of the many heralded short term issues which appear seemingly out of thin air to threaten investor destruction. (At least, you think your capital is at risk of imminent threat of destruction if you listen to the media and do not “do something” at each ebb and flow of geopolitical news). The US economy and with each passing year the global economy shows many signs of responding to the economic needs of maintaining and improving individual standards of living in spite many issues which eventually reveal themselves as trite in comparison.
What we tend to lose track of is that US Real GDP has averaged close to 3% the past 25yrs. What we have missed in our overly detailed daily news call to action media pronouncements is that an overheated economy occurs at the 4% Real GDP range and that recessions are in the ~2% Real GDP range. These are not large variations yet they result in euphoria at economic peaks and depths of despair at economic lows which cause some to describe the markets as “Bi-Polar”. We have come to recognize these extreme highs and lows in investor sentiment and to believe that it is sentiment which drives the market and the economy. This is the problem of our focus on the “Trees” and not the “Forest”. Human history is replete with instances of facing difficult problems and through examination of the details of the issue we improved our understanding to a level at which a previously unknown solution suddenly presents itself. This is the art of discovery which has served us well over the eons and advanced human society. We have attempted the same approach with investment markets the past 100yrs using many highly complex detailed mathematical approaches. The fact that this approach has not worked to date has spurred yet even greater energy in the belief that a form of market “Holy Grail” remains just out of reach if only the right mix of formula and data can be identified.
The “Forest” perspective reveals a far simpler picture. When one compares Real GDP and various economic trends looking for historical trends, one is struck with the clear correlations between broad measures of economic activity and investment markets. Rather than having to be on pins and needles alert to taking action at every twist and turn, a strategy of valuation combined with patience emerges. One can see that there are simple valuation benchmarks that markets track across investment and economic cycles. To capture them one needs to have “Patience” and courage of ones convictions in the face of the onslaught of the many urging one to “Do Something!” The fundamental driver of markets and investor sentiment over the business and investment cycle is quite simply the economic cycle. The economic cycle today is more global than in decades past as trade has tied each of us to others’ economic success in countries thousands of miles away. Each of us has become increasingly more connected to the 7.090 Billion other individuals now populating the earth. Economic cycles are increasingly correlated and they certainly are quite powerful. Once they begin to correct from excesses, they trend together! Once we begin to rise from a corrected level, global economies trend together! The desire inherent in 7.090Bil to improve individual standards of living overwhelms whether Greece, Spain, Ireland and etc. will have an economic impact on the whole. We tend to focus too much on the “Trees” and so often fail to see the “Forest”.
We react in panic to the issues