Tuesday, August 27, 2019

From the Desk of David Burks – Economic Uncertainty Highest in Years

David Burks
Author position
Sr. Vice President | Equity Income Analyst

From the Desk of David Burks

Senior Vice President and Equity Income Analyst David Burks has been with Hilliard Lyons, A Baird Company, since 1983. David has been nationally recognized for his stock recommendations eleven times: seven times by Thomson Reuters and four by The Wall Street Journal. David has appeared regularly on CNBC over the years.

Economic Uncertainty Abounds. Scary…or not?

Economic uncertainty. Have you heard that term lately? Maybe even quite a bit? Well, if it seems like you’ve heard or read the term more than usual, you are correct. The chart below from PolicyUncertainty.com proves it. This uncertainty index reflects the frequency of articles in 10 leading US newspapers containing the following trio: economic or economy; uncertain or uncertainty; and one or more of congress, deficit, Federal Reserve, legislation, regulation or White House. The index, which began in 1985, now includes nearly 35 years’ worth of data.

As you can see, the index is at its highest level in years. Moreover, it’s currently at one of the highest levels it has been over the past 30 years. Perhaps it’s not surprising given the recent sharp stock market declines, an inverted yield curve, presidential tweets, escalating trade war, a one trillion dollar deficit, 30-year Treasury yields below 2% for the first time ever, global bond yields dropping to 0% in a number of countries, and fears of a looming recession. It’s no wonder that investors may be feeling more apprehensive than usual these days. There are just seemingly so many issues that appear troublesome.

Uncertainty – A Historical Perspective

We begin with a quote by the noted mathematician and philosopher, Bertrand Russell. In his book, A History of Western Philosophy, first published in 1945, he says the following: “Uncertainty, in the presence of vivid hopes and fears, is painful, but must be endured if we wish to live without the support of comforting fairy tales.”

Strange as it may seem, we find Russell’s quote has some relevance to the stock market as well. How so? Because we believe equity investors must be willing to tolerate uncertainty to have the opportunity to achieve potential long-term capital appreciation.

High Economic Uncertainty – Bad Sign or Good Sign?

At first glance the economic uncertainty chart appears worrisome, perhaps even ominous. What does this high level of uncertainty portend? Let’s look at the two highest readings over the past thirty years. One was, not surprisingly, the Great Recession of 2007-2009. The other was around the turn of the century during Nasdaq’s dot-com bubble. Obviously both were very painful periods for investors and the economy. However, we note that when the economic uncertainty index peaked, this roughly coincided with important stock market lows. Thus, in effect, a high economic uncertainty level could potentially be considered a positive contrarian indicator. We’re not saying that’s going to happen, but we are reassured by the strength of the US consumer.

Reasons to Not Invest Always Exist

While there may be higher than average economic uncertainty right now, we would remind investors that there is always uncertainty surrounding the economy and the financial markets. We may wish this was not the case, but it’s always been that way and it always will be. At any given time there’s uncertainty surrounding Fed policy, economic growth prospects, the direction of interest rates, corporate profits, upcoming elections, and stock market volatility among other factors. For those looking to not invest, there’s always some potential justification for remaining on the sidelines. Yet by doing so there’s typically a large opportunity cost that must be borne that grows ever larger with the passing of time. We believe investors are better served by continuing to invest with a long-term focus on achieving their investment goals.

Final Thoughts

There admittedly exists more economic uncertainty than usual right now. We don’t know if that will continue to pressure stocks or not. It certainly has of late, as the Standard & Poor’s 500 has experienced three declines in August of at least 2½%, the most in any month since 2011. Also, we are getting ready to flip the calendar to September, historically the single worst performing month of the year for the stock market. Yet, like we’ve said repeatedly, there are always reasons to not invest. However, history teaches us that long term, optimistic investors ultimately fare the best. Consequently, we encourage investors to maintain their equity exposure despite the higher than average uncertainty. We believe eventually, patience will be rewarded.



Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your personal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC, A Baird Company, cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversification and asset allocation do not guarantee a profit or guarantee against a loss. Note: It is not possible to invest directly in an index.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.