“On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?”
-English Historian T. B. Macaulay
It seems there is always a tug of war at work in the financial markets. The good news bulls vs the bad news bears.
Over the last 6 – 12 months the bull pen for the bad news bears has included such notables as: Inflation (see food price and gas); rising interest rates; unheralded human suffering and displacement in Japan; the Middle East problems which seem to add a country a week to the list of turmoil; Interest Rate hikes (China has had a couple and it looks like higher rates are just around the corner in the developed world); horrendous unemployment; and of course the big one, World Debt (anchored by the nagging idea in the back of everyone’s mind- and the forefront of many- that the US, the mightiest of the mighty, may one day default on their obligations). Not a bad line-up. Or should I say, it’s a terrible line-up.
Of course the bull-pen on the other side, the good news bulls, seems by comparison, a little weak. Sure GDP is nudging its way back up to 4%, corporate profitability and earnings are at healthy levels as are cash flows. And as for debt, it doesn’t seem to be a corporate problem as much as it is a government and a personal one. But that’s it for the good guys.
So when it comes to making an investment decision, you have to pick a team. Based on the above information, you might be inclined to pick the bad-news bears but for me, I’m going with the good news bulls and the reason is simple – they always win.
If you go back to the end of the civil war (we often use US statistics because they are readily available and so closely resemble Canada’s), Gross Domestic Product (GDP), which is an approximation of the value of goods produced per person in the country, has increased from about $3,500 to $45,000 and that’s after you take inflation into account. So we are over 12 times wealthier than we were back then and with the exception of the mid-thirties the climb has been interrupted by only slight adjustments along the way.
We eat better, we travel better, our infant mortality is a small fraction of what it was back then and our life expectancy has risen from our late 30’s to our early 80’s (we live over twice as long as they did less than 150 years ago). We communicate with each other in ways we couldn’t have fathomed even 20 or 30 years ago. And while still a problem, poverty is significantly less than it was then. Fortunately, I could go on and on.
And yet, over all of those years of progress, there were precious few when the bad news bears couldn’t have mounted a team equally as impressive on paper as today’s team. They seem to be able to recruit new “bad news” ad-infinitum. Whether the problems are climatic, economic, political, military, or social, humans always seem to overcome them and continue their progress forward to higher and higher standards of living.
And that human progress is reflected in the prices of the companies that make up our economy, or the stock market. It too, has had a continual rise from the bottom left of the chart to the top right. And that rise has been greater than any other investment class you can name. Granted, it has had its negative periods, such as the one we just came through in 2008/2009 which while nerve-racking at the time, are only short term interruptions of a long term trend.
So if you ask me where the markets are going in the short term, I’ll tell you I have no idea but if you ask me where it’s going long-term I have no doubt…its going higher.