As the markets continue to fluctuate and anxiety continues to surge, I am often asked how as consumers of information, you should assess the barrage of information barreling towards us every day. Each week we assess each of these categories and watch for the key factors to see if our investment thesis merits adjustment on any invested assets as well as our overall allocation.
There are 4 categories of information flow:
Category One – The Economy
The economy matters and the key indicators are jobs numbers, manufacturing indices, and housing starts. As you assess information about the economy, recognize these numbers are often very volatile and this is why it is confusing when you read media reports about economic data. In transitional economic times, the information is never a straight-line indicator. Instead it is a jagged line with some positive news mixed with negative headlines.
The market, like an adolescent child, responds emotionally to each new set of number that come out each day reflecting the strength or weakness of the economy. Companies are not immune from data flow. Bank of America and JP Morgan have been in the news lately and news flow impacts these companies as well. Look at the short-term fluctuation as an emotional reaction. This is not to say it is not important; we do watch data closely as some of these numbers might merit a proactive short-term course of action. However, remember that the media will often present information based on a short term view and most stories will not focus on long-term trends. That’s neither good nor bad; it just is.
Category Two – The Federal Reserve
Ben Bernanke has clearly proven to be an interventionist Federal Reserve leader. It is a controversial stance and we are starting to see the political candidates discussing ways in which they might attempt to impact the direction of Fed policies. A few former Fed governors have criticized Bernanke’s policies. Even within the Fed there are dissenting viewpoints. Right or wrong, the reality is that we have a hawkish Fed, and as such, their actions will make a difference to the market and the economy.
The latestOperation Twistprogram is a clear example of Fed policy designed to drive interest rates lower. I expect more policy action in the near future as Federal Reserve governors have been providing their insights in speeches around the country and the common theme is the economy is weak and growth needs to be stimulated. Keep an eye on Fed announcements, minutes of Fed meetings, and speeches.
Category Three: Europe
The markets right now are largely driven by headlines news out of Europe and the fear that a Greek, and a possible Italian debt default, will cause global chaos. I don't believe this is the case, but Europe certainly does need to put its house in order and figure out how it is going to assist weaker nations (or at least develop a mechanism for default in an orderly way).
The positions that Germany and France take, as well as the commentaries coming from leaders of these two nations, are crucial as these two nations are driving the policies of the European Union. Expects drama news flow for many months.
Category Four: US Politics
Like you, I shake my head in disappointment when I see politicians wrangling and not working together to come to a consensus. Principles matter and it's important to take a stand but there does get to be a point when the greater good must ultimately be reflected in the decisions made. Government shutdowns are ridiculous. Even enlightened CEO’s are beginning to doubt the government. Starbucks CEO, Howard Schultz , recently urged other CEO’s to boycott involvement if the stalemate behavior continues.
There is a competing school of thought as usual about the role of government in the political discourse today; the argument of big versus small government. Watch for political winds to shift and recognize that the debate centers around how the economy should function; free-market versus managed.
Unless either party overwhelmingly wins a majority, the impact of politicians on policy direction will tend to be fairly muted (although they can negatively impact the world through procrastination). Political headlines will be more important in six to nine months, with the exception of legislation that is scheduled to wrap up at the end of the year to determine which programs will be cut.
These four key categories help us sort through the news of the day. We assess these four categories and each week and we determine which factors within each category will likely move the market. Sort the information as you digest the headlines; it will help you make sense of a chaotic world
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of YCMNET's Investment Committee at . Founded in 1986, YCMNET is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutional investors and individual investors. The firm works with clients around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009 and 2010. He oversees all investment and research activities of the firm and is actively engaged on a daily basis in the firm's securities analysis activities and determines the macro tactical asset allocation weightings for client portfolios. He works with YCMNET's investment team in integrating behavioral investing strategies with the firm's core fundamental perspective. Michael holds a Ph.D. in education, other advanced degrees, and holds the Certified Financial Planner® (CFP) designation.