ETF Prime Archive

Market “Signs”

Most will recall the 1970s hit song “Signs” by Five Man Electrical Band.  Even if you don’t initially recognize the tune, the iconic refrain will likely jog your memory:

“Sign, sign, everywhere a sign

Blockin’ out the scenery, breakin’ my mind

Do this, don’t do that, can’t you read the sign?”

The song was written by the band’s lead singer, Les Emmerson, after a California road trip.  From Songfacts:

“Emmerson wrote the song after taking a road trip on Route 66 in California, where he noticed a plethora of billboards that obscured the beautiful scenery.  This posed a question:  Who is allowed to put up signs that interfere with nature?  This led to another query:  Who gets to make the rules that appear on so many signs?”

“Signs” is the perfect description of investing in 2019.  The S&P 500 is up 20%, broad U.S. bonds have gained close to 9%, and nearly every major global asset class is positive.  However, a plethora of “signs” is obscuring the beautiful returns.  China trade war, yield curve inversion, mixed signals from the Fed, negative interest rates globally, Brexit, impeachment… every day there’s a new sign, blockin’ out the scenery and breakin’ your mind!

Worse, the signs are often contradictory.  Imagine driving to an intersection with a large traffic light flashing green and red!  That’s investing in 2019.  Sentiment on the China trade war sways back-and-forth based on tweets, news headlines, and tenuous trade talks.  A yield curve inversion (where longer-term U.S. Treasuries yield less than shorter-term U.S. Treasuries) has preceded every recession since the 1950s, though some believe “this time is different” given unprecedented central bank stimulus since the global financial crisis.  The unemployment rate is at a 50-year low, yet the Federal Reserve is beginning purchases of shorter-term treasuries – more stimulus.  Negative interest rates are, in and of themselves, a confusing sign.  Shouldn’t you get paid to lend money?  Good luck deducing how Brexit, the United Kingdom’s pending withdrawal from the European Union, plays out.  Politicians, the British people, and smart economists can’t seem to agree.  A possible impeachment hearing for President Trump?  Does anyone really want to handicap how that might go?  Do this, don’t do that, can’t you read the sign?

Another complicating factor is investors may interpret the exact same signs differently.  Consider how political affiliation impacts sentiment on the economy.  Everyone has access to the same economic data, but draws wildly different conclusions!

Source:  JP Morgan

Conflicting economic signs, along with differing interpretations of those signs, is reflected in how investors are approaching financial markets right now.  Investors are buying stocks, while also flocking to safe havens like gold and long-term Treasury bonds.  It doesn’t help to have a 24/7 financial media complex with a fondness for creating flashy, confusing signs of their own.  CNBC has produced 28 “Markets in Turmoil” specials since stocks bottomed in 2009, including three this year!  Attempting to read these signs not only interferes with your investment journey, but can lead you in an entirely wrong direction altogether.

The point in all of this is not to say signs have no value.  The challenge is, in the past, some of the current signs in isolation may have been excellent indicators for what might lie ahead.  In today’s environment, there are contradictory signs everywhere.  Sometimes, the best thing to do is weigh the evidence and realize there isn’t a particular sign that’s an ultimate indicator.

The good news is investors can make their own rules and decide which signs to follow.  Often times, the best way to experience a long road trip is to set the GPS on your car or phone, crank up the music (Five Man Electrical Band included) and ignore the signs.  You will arrive safely at your final destination, having enjoyed the beautiful scenery along the way.