The Fashionable Pessimists
WASHINGTON, DC -- Grey skies; a constant, saline spray from the oversalted, meltwater-crossed road; crazy, half-conscious drivers and their taillight contrails; beneath the endless orange glow of 8-gillion-watt street lamps along a 10-lane interstate. It was a typical morning commute except for the fact that my six year-old daughter occupied the back seat of my old Honda. (Schools were closed and she likes to hang out with Fools.) I was sipping at my coffee, waiting for a dose of chemically induced happy to help me face the day, when I heard this. "Daddy, look at all the beautiful lights, the way the orange curves up through the gray sky, and the red car lights blink in the dark."
Not for the first time, I wondered how it was possible that this goofy little bundle of positivity could have half my genetic material. But I quickly refocused and brought my photographer's mind back up from the brain's basement, and I saw that she was right. Turn the switch and look for the good, and things looked beautiful despite the fact that the landscape was composed of miles of concrete, streaking traffic, and oily, crusted snowbanks wilting on the shoulders.
Life changes with your outlook, and, for better or worse, so do economies. An economy controlled by fear of a downturn creates a self-enforcing cycle, a feedback loop, in which consumers and businesses all pull back on spending, creating the very recession that they fear. Well, creating may be too strong a term. There's long been dispute among academics and pundits as to the relationship between the perception of lost wealth from stock market drops and its causal relationship with full-on recessions. These usually end with the economic eggheads unable to crack the chicken-or-egg dilemma. For some time, it seemed to be a matter of faith that stock market movements don't create recessions -- that they merely reflect underlying economic problems about to come to pass -- but I've heard some recent, fairly persuasive arguments that big (say, 10%) sustained drops in stock markets indirectly cause drops in employment, triggering recession. I'm not sure which theory I believe, but my opinion matters a lot less than Janet Yellen's, and the Fed Chair just said that falling stock prices do constitute a risk to economic growth.
I don't believe we'll ever know for sure which is the chicken and which is the egg, but it's clear that pessimism keep recessions rolling, even if it doesn't start them, and that the cycle of fear, loathing, and poor growth continues until it doesn't.
Of course, a sinking market sinks all stocks, some more than others, and small caps have been getting dunked for the past 12 months, to the tune of a near 20% drawdown for the Russell 2000. Despite all that, the question for us investors always remains: Is the current sentiment, as expressed through prices, rational? Does it properly reflect the long-term value of the business(es) on our buy list?
I'm not convinced the pessimism is warranted. As we've discussed in a couple recent episodes of our audio program, Hidden Gems Uncut, unemployment numbers have been good, there's a new report of strong job openings, and better yet, there's reasonable wage growth, enough that American employees are quitting their jobs to take higher-paying positions.
That's all good news. But you'll be hard-pressed to notice it amid the dire headlines of the past couple of weeks.
In the news, it's all problems, from the China slowdown to low oil prices. And if you listen to the presidential candidates, America is on the brink of falling apart! Back in journalism school, we learned -- and this was a bit depressing -- that research had showed that the news isn't very good at changing anyone's opinion, but it is good at setting the public agenda, determining what people are talking about. If the public agenda, as reported by both financial and political headlines, is "Everything is awful!" then who can blame the masses for feeling nervous?
Even the folks with more money than they'll ever need seem worried. Some of them, anyway. There's a recent, interesting article on Bloomberg in which a trucking company CEO discusses increased shipments of consumer goods, calling those companies that serve consumers "closet positive" and noting that the so-far absent drop in trucking demand is possibly the best recession indicator we have. The CEO explains that, despite the good news he sees, attitudes among his rich peers are different: "It's not fashionable right now to be positive."
Sounds to me like group-think at its finest. I advise you not be a fashionable pessimist.
Looking further out than recent weeks' miserable mood has always been a way for smart, patient investors to find incredible bargains in stocks. It can be tough to avoid group-think, which is why my toolkit now includes a mental reminder to channel that shockingly, unfashionably optimistic little girl in the back seat of my car who can find beauty on the dreariest days.