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June 2016 Perspective: When Not Good Enough Is Just Right

June 27, 2016

This month’s Perspective comes from Krishna Memani, Chief Investment Officer at Oppenheimer Mutual Funds in the form of a short video. There are currently two dominant camps, or perspectives, when it comes to investing in the stock market. Each camp has its own narrative to support its view.  Neither is entirely right or wrong so it is important to understand both in order to have a well-rounded investment perspective and avoid being caught by surprise.  This month’s video takes a look at one of those Perspectives, we hope you enjoy:


When on the page, click on the video “The Cycle Continues, Barring Major Policy Mistakes”


The following is a simplified summary of the core conflicting messages you are probably hearing in the media along with the next step you should take if you haven’t already…


The Two Camps:


First, there is the “doom and gloom” camp.  Their narrative tends to anchor on historically high “unsustainable” debt levels and various data points that suggest the real U.S. economy (Main Street) is not doing very well. The narrative suggests investors should get out of stocks to varying degrees and hold safe haven assets like treasury bonds, cash, or perhaps gold. Interestingly, both premises (historically high debt and struggling economy) have been true for years, but investors who dumped stocks in favor of cash missed the opportunity to potentially double the value of that portion of their portfolio over the last six years.*  At some point we will have another recession, it may get ugly as recessions often do, and this camp will be “right”… missed opportunities and years of generally unhappy outlook notwithstanding.


Second, there is the “party-on” camp.  While their narrative has been tempered by the last year and a half of zero growth (the S&P 500 closed at 2,088 on 12/26/14 slightly above today’s close of 2,083 on June 20, 2016) since the Federal Reserve stopped printing mass quantities of money in December of 2014, their optimism continues. The current narrative, which carries a tone of cautious optimism that modest growth will continue for several reasons, is neatly captured in this month’s Perspective. The implications are to continue holding assets like stocks and bonds that have seen substantial price appreciation over the last several years. Investors that have followed this camp’s narrative have been “right” and likely done well overall since the last recession.  


The Caveat (Because Every Narrative Needs One):


The giant caveat to the narrative of both camps is a potential policy mistake. The doom and gloomers see the experimental and historically accommodative policy that central banks and governments have been using as a mistake that will eventually lead to the disastrous results they predict. The party-on crowd sees discontinuing accommodative policy as the equivalent of taking away the punch bowl from the party, while actually reversing accommodative policy and going back to the historical norm would be like stopping the music and turning on the lights. A big mistake if you want to keep the party going.    


Your Next Step


At the moment we are in an interesting place where the economy is not doing well enough for central banks to go back to normal policy and that appears to be just right for the stock and bond markets. The big question for investors is should I give up near term opportunity for growth to protect myself from a potential longer term loss?


In our world, there is a third option we would like to discuss with you. But first, you need to tell us about your investment Comfort Zone. Your next step, if you haven’t done it already, is to complete your Riskalyze questionnaire.  We will be in touch shortly after you're done.

*Based on S&P 500 Index return.