Uncertainty and stocks don’t always mix (except when they do)
by John Manley, CFA, Wells Fargo Asset Management
“By the pricking of my thumbs, something wicked this way comes.” “Macbeth”
Apparently, there is an old superstition that a tingling of the hands and fingers is an omen of bad things to come. The stock market has neither hands nor fingers but something certainly was buzzing on Wall Street this past Friday.
The news in the prior three weeks had been quite good. In particular, forward consensus earnings expectations appeared to be nudging higher after almost two years of stagnation. That this seemed particularly true for small- and mid-cap equities was doubly encouraging to me since it seemed to indicate that organic growth (which is one of the few ways that smaller stocks can generate profit expansion) was the driver. So far it has been a small move but one that seems to reinforce the positive stance on smaller stocks held by my friend and colleague Dr. Brian Jacobsen since mid-February. Mid caps have been cheap versus large caps for several years but lacked an earnings kicker needed to eliminate that inefficiency. Better earnings growth should be good for almost all stocks, but the effect should be more pronounced down the capitalization trail.
Then the markets started to look to the weeks ahead and began to worry about uncertainties before us.
Uncertainties are the stuff that the future is made of. That has always been the case. However, sometimes we investors read those uncertainties as risks and sometimes we view them as opportunity and, sometimes, we go back and forth. Usually, when risks are keenly felt, there is more room for improvement in sentiment (and price) but that is seldom a straight path. Sometimes, however, fear increases or subsequent events prove past fears to be more than justified.
There are certainly a lot of questions before us. Chinese economic numbers released over the weekend seemed like more of the same: solid consumer spending and sluggish manufacturing. The question of the government’s currency moves in reaction to this is still a question—so are the policy statements of our Federal Reserve and the Bank of Japan. A vote to move Great Britain from the Common Market, which I thought was moribund several weeks ago, now seems a very real possibility. Populism, in general, seems to be gaining strength on both sides of the Atlantic.
For the stock market, one week’s problems might become another week’s opportunities
On Friday, investors decided to view these as potential problems rather than potential positives. Who knows when they will change their minds? Since the calamity of 2008, most of us have been quick to run for cover at even the whiff of a problem. I think that that predilection will eventually expire and the stock market will be the better for it. However, as last week proves, timing that epiphany is a frustrating enterprise.
So, after a fairly good run up toward the old high, I suspect that stocks churn for a while. Fundamentals are improving, but I know that much can go wrong. Right now I would describe myself as “worried but not scared.” We will see which way my sentiment goes.
To end, I would like to insert a bit of philosophy for long-term value investors from Sir Francis Bacon: “If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts he shall end in certainties.”
I hope that comforts you in the turbulence ahead, but not too much.
Copyright © Wells Fargo Asset Management
