ETF Radio Show

Are You a Glass Half Empty or Glass Half Full Investor?

Nathan Geraci is President of The ETF Store, Inc. and host of the weekly radio show “The ETF Store Show“.

A noteworthy story from the first half of 2017 was the historically low volatility in the stock market.  Considering the never-ending litany of stories on President Trump, the Federal Reserve, and concerns over North Korea, Russia, and Syria, you might have expected a more turbulent ride for stocks.  However, volatility was nowhere to be found.  As we mentioned in last quarter’s commentary, 1% up or down days in the S&P 500 have historically been fairly common, occurring roughly one out of every four trading days.  Thus far in 2017, the S&P 500 has produced just four moves greater than 1%, the fewest since 1964.

Depending upon your view of the markets, it is likely you interpret this lack of volatility in one of two ways.  If you are a glass half empty investor, this is the calm before the storm.  With uncertainty over what the Trump administration may or may not be able to accomplish (tax reform, infrastructure spending, etc), along with ambiguity over Federal Reserve policy and geopolitical tensions, the lack of volatility is disconcerting.  Combine that with S&P 500 stock valuations appearing stretched and the continuing debate over the health of the U.S. economy, and glass half empty investors are already nervously preparing for the next bear market.

Glass half full investors interpret low volatility as evidence of a near-goldilocks environment – not too hot, not too cold, but just right.  The first half of 2017 was close to perfection for these investors.  The S&P 500 gained over 9%, bonds produced positive returns across the board, and volatility was absent.  All of this amid a backdrop of historically low interest rates, low inflation, corporate earnings growth, a strong housing market and unemployment at its lowest level in over 16 years.

Concerns over politics, the Fed, and international conflicts are easier to brush aside when the preponderance of the evidence points to a healthy economy and the stock market continues to rise.  As a matter of fact, according to Goldman Sachs, in the last 14 similar low volatility periods since 1928, it has typically taken a significant catalyst such as war, terrorist attacks, or an economic recession to cause a spike in volatility.  With no such catalyst appearing eminent or predictable, glass half full investors have chased away glass half empty investors so far this year.

So what does this mean? 

“The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap).” – Benjamin Graham, The Intelligent Investor

In investing, most everything can be viewed through either an optimistic or pessimistic lens.  Each of us has been colored by our past market experiences – both positive and negative – which have influenced how we currently perceive the market.  But perception is not always reality.  While Benjamin Graham is correct that the market is a swinging pendulum, investors’ ability to determine the current position of the pendulum is limited at best.  While trending down, one recent measure of how confident consumers, workers and investors are in the pace and direction of the U.S. economy is neutral – hardly unsustainably optimistic or unjustifiably pessimistic.

To ensure your past stock market experiences do not negatively impact your future investment returns, a useful exercise is to consider outcomes contrary to your belief system.  For glass half empty investors, ask yourself how you will react if stocks go up another 25 – 30% from here?  For glass half full investors, consider what you will do if stocks crater 25 – 30%?  Your answer to these questions may help quell an unnecessarily bearish outlook or tame a euphorically bullish viewpoint.  At the end of the day, maintaining a realistic, balanced perspective on the market and keeping emotions in check tends to lead to investing success.

“If we talk about the glass being half empty or half full, I want to know what does the glass look like from underneath the table?” – Brad Thor, #1 New York Times bestselling author

The fact is, significant market moves tend to occur when investors least expect them to occur.  Market volatility, the news cycle, and even stock valuations rarely serve as accurate buy/sell signals.  At The ETF Store, instead of viewing the glass as half empty or half full, we look at the glass from many different angles.  Considering a wide range of outcomes – both good and bad – helps us keep an even keel.  Our portfolio strategies are built to react properly to the expected and to weather, or potentially even withstand, the unexpected.  Whether you are a glass half empty or glass half full investor today, it is our job to ensure your financial success and a full glass down the road.