Melanie and I recently returned from a much-needed Texas road trip to hug up on our two-year-old grandson (pictured here on his own road trip!) and to provide his parents with a few meals not cooked in their kitchen, if anyone knows what that means. Four nights and five days was the perfect tonic for our souls, but it made leaving bitter-sweet.
As we headed east, toward Natchitoches, LA for the night to enjoy their famous meat pies and do a little Steel Magnolia snooping, we got into a discussion, as we often do, about the economy and the markets. Melanie, despite her denials, is an astute observer of both and wanted to know how a slowing economy might impact markets. My observation was that it had already greatly impacted the bond market causing interest rates to plummet here and abroad. If interest is the price you pay for money, then as the demand for credit lessens, the price paid (interest rates) will typically fall and that is exactly what has happened. It’s all about supply and demand.
As for equities, international markets have not fared well recently, but U.S. stocks have remained resilient in the face of our economic slowdown, primarily because of the afore-mentioned low-yielding bonds. The further interest rates drop, the less attractive “safe” alternatives like bonds become. As an example, the current dividend yield from the S&P 500 is higher than the yield from the 10-Year U.S. Treasury note. Although our economy is slowing, a recent report by the ISM (Institute for Supply Management) confirmed we are still growing, just at a reduced rate and the U.S. logged its 125th consecutive month of growth – another record.
I compared the economy slowing to the change in speed limits we were experiencing during our drive home. All throughout Texas, the speed limit posted on most four-lanes was 75 MPH and if you drove below that, you were at risk of being run over. Once we got back to Louisiana and Mississippi the posted limits ranged from 55 to 70 MPH, a much-noticed difference, but we were still moving forward. Even though the economy is slowing from a 3% growth rate to a 1% - 2% rate, it is still growing. We will eventually encounter a recession (we always do), but that would be no different from a temporary delay in driving due to construction work or a fender-bender. Eventually, we start moving forward again and continue our journey to our desired location.
Just keep your eyes on the road, avoid texting, follow a GPS or map, periodically refill the tank and things usually work out as desired. That’s not unlike successful investing – follow your plan, avoid distractions (like sensational, panic-inducing media noise), rebalance when needed and ask for directions (advice) when unsure.
Best wishes for successful journeys.
