Strategist View: Pessimism or optimism?

Market strategists are often put into one of two camps: perma-bears, who deliver a steady message of doom, such as “prepare for the imminent collapse,” or perma-bulls, who always see the rosy side.

In my work, I’ve never run across anyone who fits these simplistic labels. I find that most of my fellow strategists and economists are trying to sort through and evaluate large amounts of conflicting and puzzling data. We face the reality that the world around us is always changing, and our forecasts may need to adapt to what we actually observe.

Market pundits and the media, on the other hand, apparently don’t need to limit themselves to working with facts, and they often have short and selective memories. So they assign labels that are inaccurate or misleading, and find fault with strategists who end up in the wrong camp.

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The memory of episodes of market paralysis during the 2008/09 financial crisis may have kept investors from seeing the possibility of regrowth.

Even in 2010, after the economic recovery was underway, investors stayed on the sidelines, believing that there was still too much debt in the system, but private sector debt was soon worked off. Over the next couple of years, more investors stayed away, convinced that profits had peaked, but they missed out when profits continued to rise.

Then there’s the claim that fewer full-time workers are employed now than at the previous cycle peak, and the conclusion must be that it’s still not a good time to invest.

But this misses the point. Those with jobs in the private sector are working longer hours. While some might argue that the 2.4 per cent annual growth of US GDP reported so far in this cycle has been below par, others could dig deeper and find that the private sector has been expanding at 3.4 per cent.

The fact is that companies in the US and around the globe are in their best shape ever: products are better, balance sheets are healthier, margins and returns on equity are high by historical standards. Right now the markets are going through a risk-off period, showing an aversion to risk not seen for more than a year.

Many emerging countries are stumbling, and investors want to take some money out of the market. This is normal market behaviour and does not suggest that bias and opinion should drive action.

Should investors be bullish or bearish? My answer is neither. The best stance is to be open-minded, considering the risk of spirals, but balancing those possibilities against factors like cashflow growth, competitive advantages and costs.

There is no reason to be optimistic just because it feels better to have a sunny disposition. Be optimistic if the facts warrant optimism. For investors sizing up the US markets, the advantages inherent in cheaper natural gas and technology — which can be used to cut costs and sell at more competitive prices — are likely to win out over the long run.