It’s a simple assertion, “keep your eye on the dot” – but which dot do I keep my eye on? Even with thirty-one years of focus on the financial markets, I feel that listening to the financial news these days is like watching an amateur magician hold a shiny object in their left hand while palming a card in their right.
What is the real market trend? Are we at the end of an extended recovery, or will the economy start to see broadly based growth? If we are to make informed decisions regarding asset allocation strategy, what information should we be focused on now? Here are the dots we keep an eye on:
Federal Reserve Policy
The Fed will raise rates, the question is when? The other question is does it matter? The answers are; “when they want to” and “probably not”. In truth, the Fed is already lagging. The market has its own pricing mechanism and interest rates are now moving higher – witness the recent turbulence in the financial markets. So, as this is the most anticipated rate increase in history, when the Fed finally decides to move there will be some volatility but we doubt that the markets will have a “taper tantrum” of the magnitude we had in 2013.
Currency
The dollar made a major move in the last half of 2014, strengthening against every major freely traded currency around the world. Emerging market currencies are now especially depressed. The currency moves have had an unfavorable effect on large U.S. based firms with sales to foreign customers. We are watching for opportunities in global markets that will benefit from a favorable exchange rate.
Loan Origination Rates
You can drive the cost of borrowing to zero but if household consumers and business producers can’t, or won’t, borrow money the economy doesn’t grow. When healthy, the genius of our banking system is in its ability to efficiently allocate capital and grow the economy. But the system faltered and its capital allocation process was compromised. Fortunately, the banking system is healing and we are watching loan origination rates to see if it reassumes its proper role as the fuel to our domestic economic engine.
Wage Growth and Participation Rates
The headline unemployment rate is very encouraging. But in nearly every local coffee shop one runs into folks talking about taking a second job, finding a new career, or kibitzing about “early retirement”. If the “real” economy is indeed growing, the data should indicate higher wages and more people rejoining the work force.
These are our four primary data points, as we evaluate the economic landscape. If the Fed doesn’t become overly restrictive, businesses and individuals borrow money to buy things, and more folks earn higher wages, companies will enjoy revenue growth. The market will like that. This list gives us a starting point and is not the complete picture -one must stay abreast of all the news and noise or risk being surprised. There are even more factors to consider from a global perspective. We will cover our top global indicators in a future post.
At Riverside Financial Group LLC we conduct regular top down investment reviews, starting with an assessment of global economic forces and ending with a review of every aggregated client portfolio and account. We compare the performance of each holding to the economic themes guiding our investment decisions and to its top category equivalents. This monthly process gives Charlie the data to make the recommendations most relevant to your investment goals.
These are the opinions of Riverside Financial Group, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
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