Ignoring the Market Headwinds

As a high school student and cadet officer in the Civil Air Patrol (CAP) in Jacksonville, Florida, nostalgically I remember flying in a L-16 light utility aircraft. The Aeronca L-16 was a small single-engine prop-driven airplane built for the U.S. Army between 1946 and 1950. After 1955, large numbers were transferred to the CAP to be used primarily as spotter planes in search and rescue missions.

 The L-16 had a service ceiling of 14,500 feet so we flew “low and slow.” With a cruising speed of around 90 mph, with any significant headwind, cars on highways below often made faster progress.

 Normally one expects airplanes to progress faster than ground traffic. The L-16 experience inversely seems to reflect a higher flying stock market moving faster than the headwind buffeted economy. So far in 2013 market averages have advanced despite perceived impediments—an anemic recovery, slow job growth, rising interest rates, a government shutdown and budget battles, spending cuts under sequestration, speculation about a potential “tapering” of Federal Reserve stimulus, uncertainty over the naming of a new Fed chairperson,  chaos in Syria, high oil prices, and buffeting in the healthcare sector midst a sputtering debut of the Affordable Care Act.

 Remember the mantra, “Sell in May and go away”? Didn’t work this year. On August 30 CNBC noted that since 1950, September has been the worst month for stocks. Harry Dent predicted a 10% correction leading into October. The S&P 500 index was up over 3% for the month. An October massacre? Averages hit new highs.

The L-16 was tossed about in clouds or crosswinds, but it was a reliable and plucky little machine. Views at 5,000 to 8,000 feet made lasting impressions, scenes missed by today’s passengers packed 6 to 10 across in coach in big fast-flying jets at 38,000 feet. Perhaps we need an 8,000-foot view of the market, peering around the clouds.

The purpose of investing is future purchasing power, the real point of wealth. As interest rates rose, money flowed out of bonds into equities. The dollar weakened against the euro and overseas money viewed U.S. equities as attractive. Market watchers see less value in bonds going forward. With the annual yield on the benchmark 5-year CD at 1.36% on October 25, and cash producing negative real returns, value-oriented dividend paying equities continue to attract money. A well-diversified U.S. equity portfolio from a leading value-oriented manager offered a dividend yield of 3.4% at the end of October, as an example.

The nullification of old market bromides this year underscores the fact that short-run predictions and talking head prattling about market directions are akin to a windsock at an airport in a breezy valley. Take off one way and by the time you are ready to land the wind has shifted.

 True investing is not based on guessing games and attempts at timing. Long-term success rests on patience and your specific investment policy. Your personal policy takes into account the need for liquidity, income and cash flow requirements, an understanding of volatility and risk that you can tolerate, and asset class diversification. Inflation and taxation must be considered.

Kiplinger looks for 2.6% GDP growth in 2014, not robust, but respectable; inflation up from 2% this year to 2.25% in 2014; crude oil trending down to $90 to $95 a barrell;10-year Treasury notes at 3.1% by the end of 2014, compared to 2.503% on 10/25/13. Earlier this year the 10-year rate approached 3% and the market shook it off.

For investors concerned with future purchasing power, taxes and inflation are headwinds of serious concern. To spend 4% of your portfolio principal with 2.25% inflation and an average relatively low 20% tax bracket, an investor must gross 7.81% in earnings or growth to break even. This reality suggests that equities will remain an attractive asset class when combined with a strategy to manage volatility.

 

            In May...good thing you didn’t go away.

 

Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com