The year was 1999, I was an analyst for INVESCO, and my boss asked me to go with him to meet with one of the firm’s most senior portfolio managers. Our mission was to teach an old dog new tricks. I was the 30-year-old analyst who instilled confidence in most audiences because I was smart enough to impress and young enough to be ignorant of all the things I didn’t know. We showed the gentleman lots of charts and data about how his investment process was out of touch with the market. He listened with more respect than we probably deserved and then he looked at my boss and said something I will never forget, “The market is wrong.”
My boss was respectful until we left the room. He then muttered some things I can’t print, but the point was, “Can you believe this old, out-of-touch so-and-so having the guts to say he is right and the market is wrong?” Shortly after that meeting, the senior portfolio manager was encouraged to retire. Four months later, the tech bubble burst. My boss was moved within the firm and I took his place. The senior portfolio manager formed a new firm and entered into a decade of incredible success. Turned out he was right and the market had indeed been wrong.
Fast forward 20 years and I feel a little like that old man. I’m not as impressive as I used to be because time has taught me to be more humble. I do know two things: The market can be wrong; in fact I believe it is wrong right now. I also know that John Maynard Keynes was correct when he famously said, “The market can stay irrational much longer than you can stay solvent.”
We are still in a market downturn even after Santa tried to come to town on the second day of Christmas. We are even hovering right at bear market territory. This is happening in spite of record low unemployment and real wage growth. All signs are that the real economy within the U.S. is actually doing very well. So, what has the market so upset?
Tariffs. Yesterday the Institute for Supply Management (ISM) Manufacturing Index came out and was weaker than expected. This index is a survey of manufacturers throughout the country who report on a host of business activity measures. The number itself wasn’t bad, although it was lower than the previous month, but when one reads some of the surveys there is a theme: Business is on hold until we figure out this tariff situation.
Here is the thing that seems to escape the Federal Reserve and some in the administration, and in fairness would have escaped me 20 years ago: Markets are based on moods and emotions. Most of the companies surveyed will likely see little if any real impact from the trade war, where thus far the barking has been worse than the biting. That doesn’t matter, because the threat that they might be impacted is enough to cause doubt. Doubt causes managers to put off business expansion.
Then one adds to that doubt with a bad report from Apple Inc., who sees revenues declining and blames it on a slowdown in China, at least in part due to trade tensions. Then Delta Airlines reports mostly good news, but has a slight miss on their revenue growth outlook. These are the types of reports that go practically unnoticed when the mood is high, but right now anything even slightly negative will drive the market down.
Reality is now very likely to be better than the market is forecasting. In other words, the market is wrong. This is an opportunity. Perhaps the best opportunity to buy stocks that we have seen in a decade.
I feel extremely confident that three years from now an investor who bravely buys while others are panicking will be hugely rewarded. The problem is what happens between here and there.
This is a long-term buying opportunity for patient investors, but three months from now may be an even better opportunity. In other words, to paraphrase Keynes, the market can stay wrong for longer than one can stay solvent.
Investing is about balance. Balancing risk and return. Today the market is offering up a lot of short-term risk in return for some attractive long-term gain. Finding the balance is what prudent investing is about, and that is exactly what we will strive to do.
Chuck Osborne, CFA