Most, if not all of us, have had that experience of traveling for a first time in an area that we are unfamiliar with – it often happens when we are on a vacation or on a business trip. While we are now blessed with Google Maps or some other source to guide us, we still have moments when we must make a decision and it can cause us to feel the angst of uncertainty. We feel more comfortable about making a decision when we know with certainty the outcome of our decisions – black or white, with no shades of gray to concern us. Knowing that taking a certain exit will lead us to our destination is a much easier decision to make than simply taking an exit and then hoping that the next road will somehow lead us to our desired location.
Investing is all about making decisions. In fact, the financial markets are simply a reflection of thousands of people making decisions regarding their investment assets. When markets move up or down on a sustained basis it reflects a confidence by people about the direction the markets should be headed in and tends to cause more and more people to invest their assets in line with the direction of the market.
However; inevitably circumstances change and the reasons that decisions were made to buy, or sell are called into question. It is at this time that shades of gray are introduced to the decision-making process. If enough people feel the same way, markets begin to lose the same certainty in direction as they previously displayed and we begin to see bigger swings in the markets – we refer to this as volatility. In fact, volatility occurs when greater uncertainty has been introduced to the investment decision process and creates a lack of confidence in a certain outcome and a lack of direction.
While uncertainty can come from a number of different sources, the key is to determine as quickly as possible what things are short term effects – one year or less in duration and what changes have longer tails to them and would warrant adjustments to an investment portfolio. Here are some things we feel confident about at his point in time and that we expect to have longer tails to them:
Interest rates continue to move higher on a gradual basis
The U.S. economy is improving and will continue to grow despite higher interest rates
Employment is strong and will begin to exert some inflationary pressure on the economy
The single greatest point of uncertainty to us as this point is the effect President Trump’s administration will have on the economy. It is this source of uncertainty that, in our opinion, is the largest contributor to a stock market that moves around a lot; but, is having trouble with a sustained direction.
It has been awhile since we have had such a visible president who is not shy of discussing public policy on the world stage. President Trump has introduced a greater sense of uncertainty into the investment equation; but, for the time being we do not see a need to change our course of direction with respect to our investment decisions – fully invested in our stock allocations and a lighter than normal presence in the fixed income market.
Thank you for the opportunity to work with you and we wish the best for you and your loved ones.