July was ambitiously aiming for another month of stock market gains. Then POW! July 31st wiped out the entire month’s gains and then some. Stocks on U.S. exchanges lost almost 2% in one day, continuing downward the first few days of August.
Well, what were you expecting? The stock market is up over 190% since the March low of 2009 and over 16% in the past 12 months. Did you think stocks would go up forever without anyone taking a profit?
A little profit taking is normal and healthy, and quite frankly, we were wondering why it hadn’t happened sooner. That doesn’t mean we are running for the exits. On the contrary, we don’t see signs of an impending market sell-off yet. We are investors, not traders.
Oh sure, there are plenty of reasons to worry:
- Russia shot down a Malaysian passenger jet
- The U.S. and a few allies have increased sanctions against Russia
- Russia announced retaliatory sanctions
- Israel and Hamas have stepped up military actions
- The Ebola virus
And then the standby reasons that everyone worries about all the time:
- The U.S. has too much debt
- The Federal Reserve is printing too much money
- The dollar is going to lose its value
- Yada, yada, yada
(The Internet is one of the best inventions in the history of mankind. But its drawback is that it has the ability to spread disinformation and fear faster than we would have ever dreamed possible.)
Only one of those bullet points above should give you pause about investing in the U.S. economy today. The U.S. economy is very resilient and has slowly emerged from one of the worst economic calamities in our country’s history. Unemployment has declined to a manageable level and consumers are back out there consuming.
Second quarter GDP (Gross Domestic Product) was +4%, a dramatic snapback from the decline in the 1st quarter. Even better, the 1st quarter turned out to not be as bad as initially thought. First quarter GDP was revised upward to -2.1% from -2.9%.
What has my attention as I am writing this? The Ebola virus. Today it might be getting more attention than it should. However, what causes economic damage is not so much the virus itself, but the FEAR of the Ebola virus.
I’m not a medical professional. I’m certainly no expert on the Ebola virus, but here is what I do know:
- It is transmitted through contact with blood or bodily fluids, not through the air like influenza. That is a good thing. If it was contracted through the air, we all might be quarantined already.
- Symptoms don’t appear immediately. They can take a couple of days or more after exposure to the virus although 8-10 days is most common. This is a bad thing. Walking around with the virus unaware you’re infected can cause others to contract it.
- It is deadly.
- Right now, it is contained in West Africa, although two health workers who contracted the disease were flown back to the United States and are in an Atlanta hospital.
That’s pretty much all I know.
What worries me is the “several days” between the moment you contract the virus and the moment you start having symptoms.
I’m not trying to scare you with this month’s Investment Commentary. I am not at all worried that I am going to perish via the Ebola virus. At this point, I’m banking on it remaining contained.
I am not yet all that worried about the health issues associated with the virus. What I am worried about are the economic issues associated with the virus. What concerns me is that people will get scared about contracting the virus… scared enough that they begin to dramatically change their behavior.
What happens then is that people stop flying in airplanes (and if they do fly, they definitely will not use the bathroom). They stop going to restaurants, movie theatres, ball games and department stores. How they shop at a grocery store and what they will purchase at a grocery store will change. A significant drop-off in consumption could easily throw the global economy back into an economic recession.
(Maybe we should view Netflix as an investment hedge against the Ebola virus because people would stay at home instead of going out for entertainment.)
We would be faced with what is called a “Black Swan” event.
Nassim Nicholas Taleb popularized the term “Black Swan,” which is an event that deviates markedly from the norm (think 9/11). It is difficult, if not impossible to predict (think 9/11) and it has a tremendous impact on society (think 9/11). And, after a Black Swan event, many people concoct reasons as to why it should have been predicted and prevented (think Monday morning quarterback).
By and large, Black Swan events are not good for stock markets. They are disruptive to a society and damaging to an economy. They change consumer behaviors, sometimes permanently. People my age remember boarding an airplane without removing our shoes to go through metal detectors. They remember being able to open a bottle of pain pills without using a sledgehammer. They remember walking to grade school alone.
Like I said, at this point I’m banking on the virus being contained. However, if something would make us take a dramatically more cautious stance on the stock market today, Ebola is it.
As I am writing this, the 10-year Treasury bond is trading with a yield of 2.38%, continuing to confound the “doomsdayers” who have been predicting a spike in interest rates for the past six years. Maybe they will be correct someday. However, they have been wrong for so long that being correct someday will not come close to making up for all the money they have lost being wrong for the past six years.
Inflation is still on the distant horizon. Labor costs continue to remain in check and productivity continues to improve due to improved technology.
Speaking of productivity and improved technology, I don’t normally endorse a company or product, but I spent some time in Boston and New York City last month, traveling around both cities using Uber. I realize I’m probably a little behind the technology curve, and that many consumers have been using Uber for a long time. But I write about it here because Uber is just a great example of how technology can improve an existing product.
You don’t need to create a new product in order to strike it rich. Sometimes all you need to do is change the way an old product is being delivered. Back in the 70’s a guy named Fred Smith started a new company to deliver mail. Delivering mail was not a new idea. But GUARANTEEING that mail would be delivered the next day was a new idea… a new way (guaranteed) of delivering an old product (mail). He named that company Federal Express (now FedEx) and it became so successful, the company’s name became a verb. (You don’t overnight a package, you “FedEx” it.) You know your company is doing well when the name of your company becomes a verb (like Xerox or Google).
I’m not saying Uber will become FedEx, but I loved using Uber. It’s an app you can download on your phone to help you get a ride. Instead of flagging down a taxi, you use your Uber app to summon a car to pick you up. You can summon a NICE car and you know the driver’s name and phone number before he arrives. Uber has your credit card on file and emails you a receipt after your ride ends. Tip included. SOOOOOO much nicer than riding in a cab. Needless to say, the taxicab companies are not very happy about Uber. (At this time, Boyer & Corporon Wealth Management does not have any investment interest in Uber.)
I mention Uber because I feel our country is riding a wave of improved productivity, whether it be delivery systems like Uber or manufacturing systems or organizational systems. Technology is continuing to make businesses in this country more profitable and efficient. It will eventually even change the way taxicab drivers deliver their product… because they will have to adapt to the changing landscape or go out of business.
Boyer & Corporon Wealth Management is not changing our asset allocation at this time. We don’t anticipate that we will change any time soon. We feel that some stocks still represent a reasonable value and that interest rates will remain stable for the near future. However, we are monitoring the variables that we feel could lead to a market sell-off.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.