What makes them interesting, of course, is that we don’t know what to think or what to do when circumstances pile up that have not happened in decades, if ever. Trade wars, political conflict both in Washington and around the world, economic slowdowns, the debt and deficit—these events all combine to give us a situation where we really don’t know what will happen. Investing is based on getting paid for risk. How do we decide whether we are getting paid enough when we don’t know what the risks are? That is the problem we face today.
Put that way, at least we have a guideline: to respond to our best estimate of the real risks and not to the headlines. More, given the uncertainty, we know how to estimate those risks—conservatively and with a significant margin of error. If we do that, then we can invest with the usual amount of confidence.
To help estimate those risks, I look at history. Even though many of the interesting things happening are indeed unusual or infrequent, there is usually some relevant guidance to be found. The trade confrontation between China and the U.S., for example, can be understood by looking at previous episodes of tariffs and trade conflict, including, but not limited to, the Great Depression. The rising internal political conflict can be understood by looking at the Nixon and Clinton presidencies. There really is nothing new under the sun. If we can find history’s rhymes, we can do very well. This is the idea behind my series of posts on the evolving relationship between the U.S. and China. We can understand a great deal by considering the last time the world was politically divided.
The other primary tool is to keep an eye on the fundamentals, rather than the noise. Trade headlines are noise; trade statistics are useful. Monthly job growth is noise; year-on-year growth is a useful trend. Consumer confidence is an abstract number; the change over a year tells us quite a bit.
Similarly, politics is noise. In the past six months, we have had the government shutdown—and then a reopening. We have had the Mueller report threaten to take down the president—and then exonerate him (or so we are told). We have had Brexit threaten the EU—and then turn into a farce. We have had the White House threaten the Fed—and then praise it. Should we react to any of this? I would say no.
What matters for investors is the economy. That changes slowly over time—slowly enough that we will be able to see problems coming and react. What matters for markets, over time, is also slow trends. Here, though, we can find just as much noise as in the news, which we also need to filter out.
Of course, the other long-term lens is our own goals and needs, which also change slowly. When you combine slow trends in economics and markets with stable needs and goals, the recipe for interesting times is to keep a long-term, fundamental perspective and not be swayed by the small things. And almost everything is a small thing, even the ones that look pretty big at the moment.
Easy to say, not as easy to do. This recipe is worth remembering, though, as things look likely to keep getting more interesting.