This exchange has certainly underscored how two professionals can look at the same market data and come to diametrically opposed opinions. While we may be tempted to ask whose perspective is right, mine or Michael Markowski’s, that question misses the point. Investment perspectives are not about determining “the truth” of the investment markets, they are meant to help us define an investment discipline. As long as our differing perspectives allow us each to effectively make money, they both can be right.
The role of discipline in investing
Investment disciplines serve several essential functions. Information overload is endemic to investing, and full-time professionals only scratch the surface of the available information. Without effective filters, we are simply overwhelmed. A disciplined perspective helps us focus on information that will help us make money, and help us define how to respond. An investment discipline also helps us to take the bias of emotion out of investment decisions. Effective investing often requires that we go against our own natural inclinations, and discipline helps us to do what we are not inclined to do. In the remainder of this piece, I want to elaborate some essential tenets of my discipline, and explain a little more about why that discipline currently tells me to be bullish.
Don’t fight the tape
I find the best investment gains come when two crucial conditions are met. First, we need buyers who will aggressively bid for stocks. To me, “don’t fight the tape” simply means that you want a market where investors are willing to take risks and a positive balance of buyers relative to sellers provides strong support for the market. Since the market lows of March, the sectors most tied to economic recovery have performed better than the defensive areas that perform well during bear markets. High-yield bonds have outperformed high-quality bonds. And the international markets, particularly the emerging markets, have outperformed large-cap U.S. stocks. The fact that even bad news (e.g., GM’s bankruptcy) has had a hard time driving the markets lower indicates both buyer enthusiasm and a favorable balance of supply and demand. The evidence I see of risk taking and of strong investment flows indicates not only that the markets should be able to move higher, but that the risks of a severe market decline have declined.
Don’t fight the Fed
Of course, investors sometimes pay too much — or buy when buying is not truly justified. For that reason, the best investment results come when an improving economy provides objective support for enthusiastic buying. To me, “don’t fight the Fed” highlights not only the role of the Fed in stimulating the economy, but also that good economic conditions produce better investment results. More specifically, it is the prospect of an improving economy that provides the ideal conditions for investing, since the markets begin to rally before economic recovery arrives. The Fed’s aggressive stimulus last year gives us reason to expect recovery. And day-by-day I see signs of both improving economic statistics, and that economic professionals are also becoming more positive (e.g., Fed Chairman Ben Bernanke’s recent testimony). As long as the economy continues to move toward recovery, the prospect of improvement should help support the enthusiastic buying I see in the market. In my discipline, signs of aggressive buying coupled with evidence of an improving economy are a particularly bullish combination.
Differing time horizons
While I cannot speak for Michael, it seems to me his discipline focuses on a longer time frame than mine does. I actually agree with many of the longer-term concerns about the market that Michael expressed, but my discipline makes me agnostic on them for now. Long-term concerns inform the economic and market data I monitor, but I do not act on those concerns until I see evidence they are beginning to affect investor reactions or the economy. If market strength wanes, or the pattern of economic recovery is disrupted, there should be time to become more defensive. Thus, my confidence in the information my indicators provide allow me to take advantage of shorter-term bull cycles — even if those bullish periods occur within secular bear markets or against the backdrop of significant economic problems. Perhaps, sometime in the not-too-distant future, I will join Michael as a bear. For now, I think we can still make good money by remaining bullish.
Note: McCain’s opinions reflect those of the Investment Strategy group at Key Private Bank.
Follow Blog War on the future of the stock market:
- Bruce McCain, 6/1: This Bull Market Has Legs
- Michael Markowski, 6/2: The End of This Bear Market Rally Is Near
- Bruce McCain, 6/3: Actually, the Bear Market Might Be Ending
- Michael Markowski, 6/4: This Bear Market Still Has Claws
- Bruce McCain, 6/8: Don’t Fight the Tape With This Bull
