If the information provided by economists and like-minded analysts tend to lead investors astray, why do so many folks listen? I’m not sure that I have an adequate answer for that. My own approach to tactical asset allocation involves a wide range of data – fundamental, technical, economic and historical. Evidence in the aggregate is what led me to reduce exposure to riskier assets prior to the 2000-2002 tech wreck, 2007-2009 financial collapse, 2011 euro-zone crisis and 2015 sell-off. As I explained prior to the August-September downturn in “Market Top? 15 Warning Signs:”
“If your asset allocation target is typically 65% stock (e.g., domestic, foreign, large, small, etc.) and 35% bond (e.g, short, long, investment grade, higher yielding, etc.), you might choose to downshift. Perhaps it would be 50% stock (mostly large-cap domestic), 25% income (mostly investment grade) and 25% cash/cash equivalents. Raising the cash level and modifying the type of stock and bond risk will help in a market sell-off as well as offer opportunity to purchase risk assets at better prices in the future.”
In practice, I am neither bearish nor bullish; rather, we have target asset allocations for a “risk-on” environment and we reduce exposure to riskier assets when a wide variety of data set off alarms. The cash that we raised prior to the August-September downturn can be used to acquire beaten-down bargains today or broader market benchmark ETFs tomorrow.
The one thing that I am not particularly interested in? Economist and analyst “group-think.” It fails miserably when it comes to stocks. It fails miserably when it comes to bonds. And it may be equally inept on the currency front. For instance, how many of these people are insisting that the U.S. greenback can only go up? Meanwhile, PowerShares Dollar Bullish (UUP) has fallen below its 200-day moving average and has been declining since mid-March. In essence, the big move higher in the dollar occurred between July of 2014 and March of 2015; the markets moved dramatically long before analyst-economist “group-think” expressed a belief that the dollar can only move higher.
Don’t get me wrong. I do not anticipate a rapid-fire dollar demise. The global economic slowdown provides support for ownership of U.S. currency, while Fed cautiousness on the pace of rate hikes should keep the dollar from eclipsing the March highs.
Still, it is important to realize that the markets themselves know what analysts and economists do not; that is, market-based securities – stocks, bonds, currencies, commodities – know where they are heading. Economists? Analysts? The media? These groups mislead as often as they succeed.
Gary Gordon is president of Pacific Park Financial, Inc.