With markets moving and volatility picking up, the investment team has had some lively discussions recently. When turbulence breaks out there is often a tangled web of items to sort through in determining what is the major driver. Our summary view is that we’ve had a collision between complacent markets that have lost momentum as the Federal Reserve’s quantitative easing program winds down, and a European growth scare that has moved to the forefront. Negative daily news headlines don’t help either (e.g., Ebola), though these are likely temporary factors.
With the payroll tax in effect and the sequester beginning to slowly phase in, many have worried that the U.S. economy is on thin ice. But those looking for the economy to fold might have been caught off-guard with the economic data starting to surprise on the upside since the beginning of February.
It is commonplace in the business news community to talk about ‘Golden Crosses’ and ‘Death Crosses’. If you’re unfamiliar with these terms, they refer to moving averages (MA) crossing each other. More specifically they describe the movement of a security’s short term MA moving above the long term MA (Golden Cross) and the short term MA moving below the long term MA (Death Cross). A strong signal is issued when using the 50 day MA and the 200 day MA as it is generally considered a move away from bears to bulls or bulls to bears (respectively).
Today brought a lot of earnings news, including Google’s disappointing numbers (accidentally filed ahead of schedule). On balance, U.S. economic data is picking up.
Two of the most destructive forces for the economy are the words “let’s suppose” and the use of the = sign. When we put the two together, they form a combustible combination that gives seemingly well-intentioned and rational investors the power to disintegrate assets at will. This is because investors have a desperate need for quantitative models that will justify or ‘prove’ their investment theses, if for no other reason than it provides much better job security than having an investment thesis based on their good judgment and common sense. Unfortunately, this state of affairs gives rise to some of the most egregious misuses of the scientific method that one could imagine.
Ed Yardeni is President and Chief Investment Strategist of Yardeni Research. He has been a leading commentator on the economy and financial markets for 25 years, and his daily column has been required reading for Pinnacle analysts for years. Yardeni (at least for the time we’ve been reading him) is known for being generally optimistic about financial markets, which is another way of saying he tends to tilt towards being bullish whenever he can. Dr. Ed wears this on his sleeve, and isn’t at all nervous about letting his readers know that being optimistic is a much better way of viewing the world then the opposite, which tends to be downright depressing. Just last week Yardeni referred to bearish analysts as “nattering nabobs of negativism,” which you may recognize as the famous phrase written by William Safire for Vice President Spiro Agnew to deliver at the 1970 California Republican state convention in San Diego. The full quote, referring to the liberal press, was, “In the United States today, we have more than our share of the nattering nabobs of negativism. They have formed their own 4-H Club… hopeless, hysterical hypochondriacs of history.” Last year I actually wrote to Yardeni to take him to task for similar statements about his optimistic world view, letting him know that we didn’t subscribe to his research because we wanted to read an optimistic assessment of the economy, but because we expected an objective analysis of the facts as he sees them. He wrote back assuring me that he does have a realistic world view, but feels that the pessimistic view of the global economy tends to get more attention than it deserves.