Whether we’re talking jobs, housing, manufacturing, services, consumer or business owner sentiment, the economy is looking up. As I’ve expressed recently, I view this as necessary phenomena if last year’s stock market gains were legit (given that prices ran away a bit from the economy, and corporate earnings). In other words, at this juncture, it looks as though the 2013 stock market may have got it right, while the bond market (prices remaining high)—as an economic forecaster (high bond prices denote pessimism [although other factors were/are in play])—got it wrong.
As an investment counselor, times like these (long-running trend in either direction) are without question the most challenging. For this is when some individual investors begin to get squirrelly.
It wouldn’t be nearly as challenging if all of our anxious clients were of the same variety, say, like (at the extremes) tree squirrels, or ground squirrels. But of course they’re not. Some folks, the tree dwellers—amid an epically strong, and long, stock market run—see nothing but higher heights to climb. The only anxiety these folks are experiencing is over their exposure to fixed income assets (presently cash and/or short-term CDs in our clients’ case)—they utterly hate seeing that money sit idle while their equity allocation is growing virtually unabated. While the burrowers fear—amid this epic run—that the trees have grown too tall too fast and that the slightest wind will bring them crashing down in 2008 fashion.
The former (well, one or two of them) are pressing me to endorse an increase in their target equity exposure. The latter ( ” ) are asking if, at a minimum, we shouldn’t rotate (sell some stocks) now, even though we may be months away from their next scheduled rebalancing date.
From a market-timing perspective, both have legitimate concerns. The tree squirrels see the economy improving and believe that spells yet higher stock prices to come. The ground squirrels agree with me with respect to an economic acceleration merely justifying the past few years of gains. And they (not necessarily me) see a wide margin for error in the pricing of stocks on a go-forward basis.
Well, actually, it’s simpler than all that: The tree squirrels suffer from recency bias (believe what’s happening today will continue ad infinitum), while the ground squirrels are victims of post traumatic stress disorder (from the 2008 experience). The previous paragraph’s logic is what I use in conversation to let each know that their concerns are not without empirical justification, and yet there’s an opposing scenario to consider—as, surely, history (save for “ad infinitum”) supports both sentiments.
So, here’s the thing; yes, history supports both scenarios: The market could easily have more hay to make. Or—improving economy notwithstanding—we may be on the precipice of, at least, a good-sized correction. While I may have a bias (a guess) of my own, I’ll be fair and assign 50/50 odds to each.
So now what?
Now nothing. Nothing, that is, unless we can justify a rethinking of either’s allocation based on factors pertaining to their personal circumstances, as opposed to their, or some pundits’, guess about tomorrow’s market. Of the two, it would be the ground squirrel’s circumstances that, in my view, justifies a serious rethinking. For I can’t think of a circumstance more important than one’s emotional circumstance. Clearly, one who is fretting over the inevitable (the market’s gonna “correct” someday)—by nature of his fretting—has to either adopt a new perspective on, or reduce his exposure to, the stock market.
As for the tree squirrel—the exuberant optimist he is—assuming his asset targets fit his time horizon and the temperament he confessed to when we originally met, in my view, there’s no legitimate rethinking—in terms of overall stock/fixed income allocation—to be done. We could, however, rotate among sectors to a mix that may better reflect his unbridled optimism. Although that would be contrary to his advisor’s recommendation to begin tilting toward sectors that tend to produce better relative mid to late cycle results, and presently possess more compelling valuations.