The theme of maintaining a sunny disposition in spite of genuine concerns has always been prevalent in music. Bobby McFerrin told people not to fear cash flow troubles or paying the rent late in his 80’s chart-topper “Don’t Worry, Be Happy.” Similarly, an animated meerkat from 1994’s The Lion King sang about ignoring one’s worries during the movie’s signature song, “Hakuna Matata.”
If you have a significant stake in today’s financial markets, however, it may be challenging to bury your head in the Tanzanian sand. For example, the global head of credit strategy at Citigroup recently expressed that central bank policies – activities by the U.S. Federal Reserve, Bank of Japan, Bank of England, European Central Bank, People’s Bank of China – represent the quintessential source for all market movement. By extension, the analyst explained, investors have little choice but to disregard fundamentals and focus entirely on what the world’s central banks have to say.
Goldman Sachs researchers came up with similar observations. They found that that the median stock in the S&P 500 trades in the 99th percentile of historical valuation for forward price-to-earnings (P/Es) ratios. And yet, their core conclusion was that equities might struggle for price gains, but that owners would still see positive returns due to corporate buyback programs and dividends. (99th percentile, no worries?)
Bank of America has been a bit more unequivocal in voicing bearishness. Noting the Federal Reserve’s dependency on economic data for determining when and how to raise overnight lending rates, B of A analysts offer lose-lose scenarios. If data support an improving economy, the Fed tightens borrowing costs that would likely hamper stock and bond assets. If data does not support economic improvement, euphorically priced equities reach insanely priced levels, eventually causing havoc. (Hakuna Matata?)
On Tuesday, seemingly positive economic data on housing validated both Bank of America’s assessment as well as Citigroup’s commentary. Upbeat economic information fed the belief that the Fed will be tightening as early as September, sending the dollar soaring and stocks tumbling. The stronger dollar has been a source of pain for the profitability of exporters. It has also wreaked havoc on oil producers. (Don’t worry, be happy?)
I own both the music from The Lion King as well as Bobby McFerrin’s a capella melody. That said, I am not about to download them from my iTunes Library anytime soon. Why not? I believe that applying insurance principles to the investing process is the key to worrying less and smiling more.
Here are three reasons that it may be difficult for many folks to avoid feelings of gloominess as June approaches: