By Scott Reed
“The economy isn’t growing as fast as we would like.” I heard that statement on the news last week. Really? I mean, really?
Weren’t these the same people that were saying just two years ago that we were likely to go down to 350 on the S&P 500 and 2,500 on the Dow Jones Industrial Average?
Aren’t these the same people that said it would take decades to recover from the greatest financial crisis since the Great Depression?
How fickle and petty we have become. Have you ever seen an interview with one of those sailors who has been lost at sea for a long time?
When they are asked how they’re doing now that they have been rescued, I have yet to hear, “Well, OK, I guess. The pasta was a little salty on the rescue vessel.”
They don’t complain about the loud engine noise or rusty railings of the rescue vessel. They look to the future with unbridled optimism because they understand that they are fortunate to be here.
I think that attitude and a healthy amount of respect for the resiliency of the American free enterprise system would be helpful to today’s investors. The fact is, our economy is getting better.
For a long time it was getting worse and then it rotated from getting worse to getting less worse. We were in the “getting less worse” cycle when the equity markets began to turn around. Now we are actually getting better.
I know that too many people are still without a job and too many businesses still hurt, but we are getting better. This day-to-day barrage of comments from the financial press is simply a way to keep people tuned to their channel, and it is difficult to make good decisions when you pay attention to whatever spin the press puts on today’s news.
Some of you who read my column regularly will remember that I put the fair market value of the Dow Jones Industrial Average at about 12,000 when the Dow was hovering around 6,500. I projected that when the market turned around, it would move toward that fair market value pretty quickly and then we would have to “earn our way up” from there.
So far, that has been a pretty accurate statement. Most people were telling you how far down the Dow could go if this happened and that happened. Few people in the financial media were telling you how positive things were.
I will be the first to admit that I am not a soothsayer. I am not a financial genius. I do not have access to insider information that would allow me to know things the average person does not know, and I am not, as Charlie Sheen might say, “a —-ing rock star from Mars” in the financial world.
The truth is much less exciting than that. I do have the ability to tune out most of the “white noise” that comes to us every day explaining the importance of what happens “today” in the financial world. This ability has come from a quarter-century of experiencing the utter failure of trying to figure out the day-to-day significance of the markets.
My prediction on the Dow moving toward 12,000 was based mostly on pure math and a small bit of intuition. The Q ratio is a mathematical formula that calculates the replacement value of assets. We can use the Q ratio to figure out the replacement value of the market.
Once I get that number I add a touch of investor sentiment to the number and round it off. When I made that prediction back in the early spring of 2009, the answer was 12,000 on the Dow and it was very close. That prediction had nothing to do with what was happening the day I calculated the number or any day since.
If there is anything I have learned in the past 25 years in this business, it is that the financial markets will move toward fair market value over the long term. I have no idea what the markets will do in the short term.
I know you would like to know where we are going from here. I can tell you a couple of things with a great degree of certainty:
• Markets never go straight up or straight down, so it’s not rocket science to think that we might have a fall-off in the stock market sometime soon.
• The economy is getting better, so it’s not rocket science to think that the stock market might go higher as the economy improves.
My mantra every day is to block out the white noise in the media and make decisions based on facts. Also, invest for the long term because no one knows what will happen in the short term.
Scott Reed, CIMA, AIFA, is CEO of Hardy Reed Capital Advisors in Tupelo.