What truly matters to the long-term investor… (click charts to enlarge)

China’s volatile stock market?

Or the rising lifestyles and increasing global market access of China’s 1.4 billion consumers?

The threat of Greece (2% of the Eurozone economy) leaving the Euro?

Or the amount of trade the Eurozone transacts with the rest of the world? 

Exports = $190 billion a month!

Imports = $165 billion a month!

The unmanageable short-term volatility of the U.S. stock market?

Or the trend in auto sales?

Oil Prices?

Consumer confidence?

Existing home sales?

Household formations?

Jobs?

Personal Consumption?

Retail Sales?

Household Net Worth?

 

As you may have gathered from the above, when considering the state of the economy through the prism of consumer-related statistics, things don’t look so bad. And, thus, point the thoughtful investor to cyclical sectors, such as housing, financial, retail and transportation.

 

As for industrial-related statistics, we consider the above, plus such things as:

Commercial and Industrial (C&I) Loans:

Durable Goods Orders:

Industrial Production:

Unit Labor Costs:

The ISM Manufacturing Survey:

Industrial Materials Prices

Capacity Utilization

 

Suffice it to say that the industrial sector is sending mixed economic signals. A thoughtful investor will track these (and more) indicators to determine which areas to weight/underweight going forward.

 

As for the services sector, we consider the above, the consumer stats in particular, plus things such as:

The ISM Non-Manufacturing Survey (above 50 denotes expansion):

And the NFIB Small Business Optimism Index:

 

While I will forever address for you the events of the day, if we allow our thinking to get bound-up within the trees, bound-up we’ll remain. And we’ll lose complete sight of what truly matters, the forest!

Successful long-term investing is, I assure you, a top down affair. It’s the evolution of the forest we’re concerned with—the fires within it will either be extinguished or burn themselves out (better the latter). And, yes, if we’re to invest in hopes of achieving a real (above inflation) long-term rate of growth, we will indeed get ourselves singed every now and again.

In other words, events such as Greece and its creditors coming to terms (or not!), China’s attempts at market manipulation, Iran nuclear negotiations, Russia/Ukraine, etc., will run their course while folks the world over will continue to transact with one another. When times are good, they’ll trade currency for houses, cars and plane tickets. When times are tough, it’ll be aspirin and mac n’ cheese. And our portfolios will win and wane as we observe the world from the top down and follow the global flow of capital.

Speaking of following the global flow of capital, next week I’ll apply that thinking to what I’m thinking in terms of the non-US portion of your portfolio.

The Stock Market:

Last week was the definition of volatility! Starting off deeply in the red on Greece’s “no” vote to austerity, only to climb back to essentially unchanged as the Greek government conceded to reality with a promising proposal to the EU powers that be. Non-US developed markets—even after their recent pummeling—have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain constructive on non-U.S.. That said, there are a number of potential international hot buttons (as we’re presently experiencing) that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities. That’s why we think long-term and stay diversified!

Here’s a look at the year-to-date price changes (according to CNBC) for the major U.S. indices—and for non-U.S. indices and U.S. sectors—using index ETFs as our non-U.S. and sector proxies:

Dow Jones Industrials: -0.35%

S&P 500: +0.86%

NASDAQ Comp: +5.52%

EFA (Europe, Australia and Far East): +5.69%

FEZ (Eurozone): +4.80%

VWO (Emerging Markets): -0.72%

Sector ETFs:

Here’s a look at the year-to-date results for a number of U.S. sector ETFs:

IYH (HEATHCARE): +11.18%

XHB (HOMEBUILDERS): +7.77%

XLY (DISCRETIONARY): +7.65%

XLP (CONS STAPLES): +1.42%

XLK (TECH): +0.22%

XLF (FINANCIALS): -0.36%

XLB (MATERIALS): -1.81%

XLI (INDUSTRIALS): -4.26%

XLE (ENERGY): -7.16%

XLU (UTILITIES): -9.00%

IYT (TRANSP): -10.48%

The Bond Market:

The yield on the 10-year treasury bond presently sits at 2.40%. Which is 2 basis points higher than where it was when I penned last week’s update.

TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price rise 0.04% over the past 5 trading days (down 7.84% year-to-date). As I keep repeating, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.

Once again, here’s the reminder on volatility I posted earlier in the year:

In last weekend’s commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an “antifragile” (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!

One additional note on volatility: The past couple of weeks I’ve shared with you the very short-term results for markets and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). As you may have noticed, my beginning of the year optimism over non-US and the housing sector (to name two), and pessimism over utilities, appears to be justified by recent results. I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced these few short weeks into 2015. My optimism or concerns are based on factors such as valuations, trends, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along the way.