Other Things Beside Stocks Matter

Stocks continue to stumble higher, despite technical conditions that say we're in for a bit of a rest, if not a stronger correcton. Every day brings good news lately, when it comes to US-China trade and global growth. The happy trade talk may eventually prove to have some substance. After all, you'd think leaders of each country don't particularly want to be responsible for the economic blow-back from increased tariffs - at least not while they're in office. The U.S. President and his administration want to be re-elected. As for the Chinese Premier, the stakes may be even higher. The Communist government does has a reputation for more dire responses to changes of leadership besides those we've seen lately.

As for growth, the U.S. economy continues to show some strength, even if Europe doesn't. Even so, you see more positive spin put on Europe these days, especially after the European Central Bank gave up trying to tighten, and now openly pursues loose monetary policy. As for Asia, it's still relatively dependent on China. So as folks get giddy about U.S. tariffs on Chinese exports being minimized if not eliminated, Asia gets a reprieve from what was recently a pretty dire trend.

We'll see how long all this lasts.

Nevertheless, however things work out, when it comes to financial media, stocks are king. They're always center stage. It makes sense if your job is to "report" on financial matters. After all, a stock represents an ownership stake in a company. So not only can you can talk about the price of the stock, but you can talk about the company. And so sources like CNBC, Bloombert, et al fill their pages and air waves with company commentary, interviews with CEOs and others regarding what a given company is up to these days, etc.

If you find all this interesting, go for it.

While those same companies also issue bonds, there's hardly much talk about that. When you invest in a bond (or a bond fund), rather than owning a piece of a company, you're lending money to them. Companies borrow money from you and me for various reasons. Most of the time, their borrowing simply isn't all that interesting. If they're prudent, they borrow in order to fund plans to grow. Maybe they're going expand their physical infrastructure (new manufacturing plant, or other facility). Maybe they're re-financing a previous borrowing because they can get a lower interest rate and reduce how much they have to pay in interest. Some borrow to buy back their own stock from current stock-holders. That one causes a bit of controversy. We'll skip the controversy for now. It's not something so unusual these days, and, if anything, it bolsters the price of the company's stock.

In any case, there's just not that much to say about bonds in comparison to stocks. With some exceptions, the price of bonds, as opposed to the price of stocks, doesn't provide that much information to investors. The price of a stock, however, can tell us something about a company's prospects for the future. At least that's the accepted wisdom.

But here's something that's just as important as stocks that we don't hear much about these days: inflation. That's likely the case because inflation has been relatively low in recent years, particularly since the financial crisis of 2007-2009. Recently, a few charts published by d-Short illustrated just how low inflation has been relative to other time periods. The charts did this by illustrating returns after four major bear markets. They showed the recovery of the stock market after each. Without factoring in inflation, the patterns were similar. Such returns are called "nominal" returns (not counting inflation). But after doing so, you see a wide divergence between the stock recoveries after 1929, 1973, 2000, and 2007. These are called "real" returns (factoring inflation). Except for the stock gains after 2007-2009, the results were mostly uninspiring when you factor in inflation. They were mostly flat. You didn't really make anything in subsequent years after these bear markets when you factored in inflation.

Most recently, though, after 2007, so-called "real" returns have been positive. So if you were one of the few and fortunate who had the foresight to throw your money into stocks in 2009, you made out pretty good. Real returns have been almost 90% over these past 10 years or so.

Of course, the challenge will be holding on to these returns. If you don't have a plan to do that, you'll likely lose your gains, and more. That's just what happens over and over again to the majority of investors. The ones who actually stick it out through a bull market then lose most, all, or in many cases, more than their gains.

This time, you've got to think about two threats: the next bear market and the next bout of inflation. The bear market will come one of these days. As for inflation, it seems so unlikely to occur, most of us don't even facor it in much to our planning anymore. That's a mistake. There's little chance that inflation has been put to rest in our time. When and how strongly it returns, though, is an unknown - at least it is now.

So if you like thinking about and talking about stocks and the companies they represent, enjoy. But maybe you start thinking about inflation - even if you don't talk about it. Talk about it, and you may get eye rolls from those who consider themselves "experts." Talk about it to anyone who's lived through it - especially if they're not Americans, and you may get a different reaction.

Comments

Popular Posts