Weighing The Week Ahead: What Is Your Course For Uncharted Waters?

My trader feedback emphasizes a message from markets. We can all remember a time when a stock price went down and then earnings were bad, for example. The trap is that we don’t remember all the times when markets made false moves. We cannot even define the terms for a good test of such hypotheses.

There is an important wild card that may be showing up in market action – a failure of leadership. Stories like resigning cabinet members and even a government shutdown do not typically generate a big market reaction. There is growing impatience with the failure of our leaders to take care of business.

  • Why do we have repeated “crises” over a debt limit? If Congress wants to address debt, and it should, it must cut spending or raise taxes. Refusing to pay legally established obligations is nonsensical. It provides frequent opportunities for one or another party to play “chicken” and make demands unrelated to the debt limit.
  • Whatever policies are chosen, people and markets expect them to be carefully considered and reviewed. We pay plenty to conduct research, analyze data, and develop experienced staff. When major decisions seem impulsive, announced via tweets, it creates fear.
  • Leaders seem not to know what prior agreements can be relied upon. This is also damaging in our foreign policy.
  • Leaders who do use staff effectively, must still listen, adjusting decisions to what they hear. Fed officials feel confident in the strength of the economy. They believe that the balance sheet reduction, at the current pace, is not important. They may be right on both counts, but there was a lot of good advice that a little pause might be in order. Waiting a meeting or two would have little policy effect but provide an important symbol. The communications from the Fed were terrible. One of those staff members should provide a memo on what is worrying the market. The leaders should make sure it is carefully considered and addressed. I listened to six or eight interviews. While supporting market prices is not a Fed mandate, it is an important source of feedback. Leading Fed expert Tim Duy covered the story well on his blog and followed up with a Bloomberg TV interview.

These factors have created a collective effect – confusion and uncertainty.

[If you are confused about the current market and unsure how to react, you might want to request some of my papers for individual investors. Or even a complimentary portfolio consultation before we get too busy with end-of-year reports. Just send an email to main at newarc dot com]

I’m more worried about:

  • Foreign policy turmoil. The Mattis resignation highlights the unsettled state of alliances.
  • Loss of business and consumer confidence. No sign so far but spending and investment fuel economic growth. Mike Williams has a good post on how this can become a self-fulfilling prophecy.

I’m less worried about:

  • Trade issues. Good progress is all we can expect. Significant China problems are decades old. It will take more than 90 days, but we continue to see positive, incremental steps.

And finally…parachute jumping.

I trust that the sophisticated WTWA readership recognized not only the satirical nature but how realistically the article follows actual research reports. From the NPR account, of Dr. Yeh’s research:

The study’s findings were published in the traditionally lighthearted Christmas issue of the medical journal, BMJ.

“It’s a little bit of a parable, to say we have to look at the fine print, we have to understand the context in which research is designed and conducted to really properly interpret the results,” Yeh says. Scientists often read just the conclusion of a study and then draw their own conclusions that are far more sweeping than are justified by the actual findings.

This is a real problem in science.

[Jeff – It is also a problem with most research cited in financial media.]

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