Change; it is all Greek to me…

Heraclitus, the Pre-Socratic Greek philosopher, who once said that “Change is the only constant in life” highlighted the need for all of us to always plan for and be ready for the changes in every aspect of our lives.

The behavioural side of us generally speaking likes the status quo. Unfortunately, our world sees things differently. Right now we are starting to see some signs along the road we follow that change is coming. Some of the signs will play out in the coming weeks and quarters. Some of them have become irrelevant for the time being while others remain relevant. Let’s look at a few signs to see what it is we speak of:

Trump and his tweets – It has been a year since the US people put Trump in power of the largest economies in the world and so far one of his greatest one-liners has been – “Look at the stock market it is at an all-time high” (inference is he is taking claim for this recent move higher). In a review of this verbal extolling, we should be aware that Trump has had little to no policy change to date that would fire up the market. These tweets in general terms seem to have become irrelevant…

The Bond Market – It has been said on numerous occasions the smartest kids in the class run the bond markets. Now we caution that no one and we mean no one can predict the future. However, it makes sense to listen, always does, always will. Short-term yields have increased and longer-term yields have decreased. This means the yield curve is flattening. The illustration below shows the current US treasury yield curve against the curve 5 months ago. One can see that short-term rates have gone up and longer-term rates have stayed static.

Historically when the yield curve flattens this is suggestive of softening of economic growth. If the curve becomes inverted it typically brings with it a recession. From the movie Are We There Yet? The answer is no. No, we are not there yet but we are looking at this as one indicator of economic change. One specific place this can/will/should have an impact is in the banking space. The banks like a steeper yield curve; a flat curve compresses their margins. Relevant…..

Market Valuation - As Allan Greenspan (former Federal Reserve Board Chairman) once said: “But how do we know when irrational exuberance has unduly escalated asset values?” Generally, this is felt and known after the fact, or in some cases during the fact. The chart below has been shown in in the past and will likely be shown again in the future but suffice it to say the next showing will likely come with a different perspective. The chart below is a long view of the S&P 500 market. It shows the last 20 years of market price movement of the index and also the market valuation as expressed by the price-earnings multiple. The average valuation over the past 20 years is 19.49 times price earnings. The current valuation of the market is 21.8 times the current market.

One could surmise from this chart that the market is a little bit expensive relative to near-term past and longer-term average valuations. One could also say that we have some room on the upside that through 1998 ad 1999 valuations were higher still. Relevant……

Behaviour – This one is very subjective and vastly opinionated (go figure). One thing we have set a large degree of attribution to is something we have coined called “convicted opinion”. Convicted opinion is basically a very strong opinion of something happening either on a micro level or macro level. This type of opinion is generally flawed. The results are based on a large study and empirical evidence of forecasting outcomes. The results and data found that over time the most convicted opinions generally were wrong. The extreme case of this is the degree of conviction that accompanies this opinion. In our capital markets, this is starting to show up. It can show up in a variety of different forms, but it is starting to become relevant in its frequency. Relevant…

So what does this mean? The simple answer is - good question. There is some data suggesting the markets are getting towards the later innings and there is some data that suggests we could go into extra innings (maybe we are already there?). Either way, the world will change. Being prepared for that change means understanding and being familiar with the data. We are and remain focused on the data that will help us change our opinion. Relevant…..

Thanks for reading! Enjoy the holiday season as it approaches. Be safe and pay attention to the signs of change…

 

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