Tag Archives: perspective

The Signal and the Noise (Part 5)

So how do you decide?

Photo: Sebastian Lühnsdorf. Source: Morguefile

When a news event occurs, is it a new signal, or is it just noise? The European Central Bank is maintaining a negative inter-bank rate – is it signal or noise? The Consumer Price Index just came out flat from the month before – was that signal or noise?

It’s tempting to label all these interim economic reports financial static. And a lot of them are. So much data comes at us from so many directions that it’s hard to decide what we should care about. Consider inflation: two government agencies report three different indices, each of which has dozens of sub-groups. Or employment: it’s measured two different ways, and each indicator has both leading and lagging elements. If you look too closely, you get spots in front of your eyes!

If you’re involved in the markets, your attention should be determined by your perspective. If you have a long time-horizon – saving for retirement while in your ‘20s or ‘30s, or establishing a young child’s college fund – you should perhaps keep an eye on broad trends, but that’s all. Regular saving through all the ups and downs will probably be your best approach.

Similarly, if you’re drawing regularly from your nest-egg and most of your assets are committed to short-term bonds, the market’s squiggles and jiggles also shouldn’t affect you much. But when you’re in the middle – still saving, but getting closer to needing the funds – then the news will have more impact. A change in the economy’s direction might call for a change in your tactical allocation. Still, even then, looking at the trends and averages makes more sense than trying to follow every tick and tock.

In the end, whether a report is signal or noise depends on your perspective. One investor’s warning sign is another’s annoying distraction. But even the Federal Reserve – our most economically sensitive agency – only reviews policy every other month. That’s more than enough for most investors.

Douglas R. Tengdin, CFA

Rabbits, Ducks, and Markets

Is it a bull market or a bear market?

Source: Wikipedia

It all depends on your perspective. Like the famous rabbit-duck illusion. People who want to see a rabbit see long ears, a split nose, and a soft face. Folks who want to see a duck see a split bill, a tongue, and a bright eye. There’s no clear answer.

The same thing could be said about the market right now. Those who want to see a bull market point to a growing economy, falling unemployment, and rising inflation. Industrial prices bottomed in November of last year. Since then, commodity prices are up 10%, led by metals, which are up almost 20%. Rising inflation should keep the deflationary demons at bay that plague the rest of the world right now.

Those who want to see a bear market point to falling corporate profits, a strong dollar depressing US exports, and a Fed that continues to state that they want to “normalize” interest rates, by which they mean they want to raise rates—and you don’t want to fight the Fed. The market is in a pickle: if the economy strengthens, the Fed will raise rates more quickly. If it weakens, profits will fall further. In either case, it’s hard for the market to grow when earnings fall.

S&P 500 iShares. Source: Finviz

And the charts aren’t much help. The trend is supposed to be our friend, and we’re in a long-term up-trend that began March of 2009—seven years ago. But the market topped out in July of last year. Since then we’ve seen two pullbacks of at least 10%, with lower highs and lower lows. These declines are supposed to be healthy for a bull market—keeping the “weak hands” out, and avoiding speculative excess. But they also spark a lot of fear.

So by some measures the market looks fine, and by some it looks worrisome. This is often the case—we see what we want to see. Eventually, reality comes home. It’s still unclear where the chickens will roost.

Douglas R. Tengdin, CFA

Chief Investment Officer

Musical Chairs?

Where you stand depends on where you sit.

Source: Interior Designing Blog

That’s what a lot of companies are finding. In order to increase collaboration and innovation, some firms are moving employees around every few months. The idea is that by seeing and hearing what different colleagues do, workers can get new insight into how to do their jobs differently.

Continue reading Musical Chairs?