Recently, long time investor and Bloomberg columnist, Barry Ritholtz made a fitting comment about our current investment environment. He referred to it as the Rorschach-Test Economy. His key point was that today, there are data points to be found that can support nearly any view.
Where exactly we are in the business cycle is difficult to determine and whether or not we are getting close to a recession only becomes evident months
a recession starts. However, there are no shortage of experts who willingly interpret every consumer sentiment survey or piece of manufacturing data that comes out, in an effort to do just that. As Barry says, "Bull market? Check! Bear market? Check! Recession, expansion, muddle along, new normal, negative interest rates? Check, check, check!"
Just look at today's headline about GDP growth in the third quarter. The first estimate, released this morning, showed the US economy grew at 1.9%. On the one hand this is a slowdown from the prior quarter's 2% rate and well below the 3%+ goal President Trump had set for the economy.
Bad news! This proves we're headed for recession!
On the other hand, economists had been forecasting a much bigger slowdown fearing a 1.4% rate or less given the trade war uncertainty and the weakening global economy.
Great news! The US consumers remain resilient!
Here's another one. Just last Monday, the S&P 500 index climbed 0.6% to set an intraday record high of 3,041. The gains came after better than feared corporate earnings reports from companies like Walgreens and AT&T. Is this a sure sign of continued economic expansion? Or is it a sign of peak optimism - a strong bear market signal?
Psychologists refer to this as confirmation bias - we see what we want to see. The ambiguity in economic data or performance numbers gives investors and pundits lots of room to interpret "facts" and put their biases on display. And, it's not just economics or capital markets. We see a lot of confirmation bias whether the topic is trade wars or politics. The question then becomes, how should investors combat confirmation bias and find success in this type of environment?
Long time readers of our Market Digest probably already know the answer. True diversification of your portfolio - to include both traditional and non-traditional asset classes - will give you the greatest chance of reaching your investment goals. Beyond that, the most important thing you can do is actually stick with that asset allocation plan. Ignore the noise. Recognize that most so called experts really don't know where we are in the business cycle and basing your own market moves on any one interpretation of facts can lead to results you may not want to see.