‘Being Right or Making Money’ is a book by Ned Davis, the founder of Ned Davis Research Inc., one of the world’s leading investment research firms. In his book, Mr. Davis stresses that when investing one should be more focused on ‘making money’ than on ‘being right’. I follow his advice and always try to be more concerned with making money for you than on being right in my predictions. This approach played out in August 2014, when I came into the month feeling there was a high probability that the equity markets had begun my long anticipated 10% correction on July 24,2014. Initially I looked right, as the S&P 500 declined 4.35% from the intra-day high of 1991.39 on 7/24/14 to the intra-day low of 1904.78 on 8/7/14. But then, like traffic on NJ roads, the decline dematerialized as fast as it had materialized with no significant catalyst in sight. From 8/8/14 through the end of the month, the equity markets recovered all of the decline and went slightly higher. The good news is that while I was wrong about the depth of the decline, my cautious approach meant money was made. Does that mean we won’t get a 10% pullback? Of course it doesn’t! I knows it is coming, I just don’t know when.
There is a major tug of war going on right now. On the economic front, things continue to point toward improvement. On the geo-political front, the Ukraine/Russia and Middle East unrest present a headwind to growth. Here are some key economic highlights:
- According to the Institute for Supply Management “Economic activity in the manufacturing sector expanded in August for the 15th consecutive month, and the overall economy grew for the 63rd consecutive month”.
- Bond yields are down because global growth is moderate with low inflation, central banks are extraordinarily accommodative, and there is a global glut of savings (including improved government budgets).
- Consumer net worth in 3rd quarter is on track to increase +8.8% y/y, or +$6.8t to $84.5t. (source: ISI) Stock market is up, house prices are up, consumer debt is down.
- Citi Economic Surprise Index (a measure that tracks actual economic data relative to consensus estimates of market economists) is advancing solidly – see chart courtesy of ISI.
I want to focus on housing for a bit. The housing market is vitally important to overall economic health. A strong housing market impacts so many sectors – labor, materials & supplies, furniture & appliances, etc. The outlook for the housing market in the US has shown signs of slowing but I agree with the outlook as presented by GaveKal Organization, a leading economic research firm, as follows:
“US households are no longer overleveraged. The household leverage ratio, measured by household debt to asset ratio, has declined back to 1990s level and household debt has begun to show some slight uptick. Banks have started to loosen credit standards for prime mortgages, while standards for subprime lending, which tightened after the bust, look to be on the point of relaxation. Easier finance is a vital ingredient needed to draw back into the market homebuyers. Finally, more expensive rental housing is pushing people to buy rather than rent. Home ownership affordability is near its average of the last 20 years. By contrast, the migration into rental housing caused by the 2007-11 bust has made renting very expensive. Households face the choice of enduring higher rents or getting back on the housing ladder, even if they missed the easy price gains of the last three years (see chart below).”
In summary, September should bring increased volatility in the financial markets, primarily due to the uncertainty around geo-political events. However, I do not foresee any major downside risks, other than the anticipated 10% correction.
September Calendar of Events (comments and additions for future months always welcome)
Sept 2- 5 Back to school for most of us
Sept 11th Patriot Day – in remembrance of the 9/11 terrorist attacks
Sept 21st International Peace Day – was established by the United Nations in 1981. In 2002, the United Nations declared it a permanent holiday.
Sept 23rd Fall begins – The Earth take 365.25 days to make one complete revolution around the Sun. This results in the first day of Fall beginning 6 hours later each year, and moving a full day backwards on Leap Years.
Sept 24th Rosh Hashanah – is the Jewish New Year.
Sept 27th Family Health & Fitness Day – get your family together for a hike or bike ride J
I hope you find this report helpful. Please feel free to pass it along to anyone you feel could benefit from the information.
Sources: International Strategy and Investments, Raymond James & Associates, RiverFront Investment Group.
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