Pretend
October is a great month to pretend.
Children will soon be wandering your neighborhood pretending they are a superhero, a monster, or anything else their imaginations can conjure up. They will pretend to intimidate you with the innocent threat of providing them with a treat or being on the receiving end of a trick.
The political candidates are in full force pretending that their opponent is straight out of a horror movie while they possess the unique talents that enable them to solve all of the world’s pesky problems.
From my perspective, there is also a bit of economic and market pretending going on right now.
Based on polling and personal conversations, it is abundantly clear that many Americans are pretending that the economy is awful right now. It is true that a serious bout of inflation does feel awful, and that increased prices generally do not revert to pre-inflationary levels. That can make a family budget ill.
Expanding from the personal level to the country-as-a-whole level, we see very few signs that the economy is in trouble right now. Unemployment is trending higher this year, but most of that can be attributed to previously disengaged working-age adults starting to seek jobs. Inflation feels higher because past price increases did not reverse, but the overall trend for future inflation is gradually slowing. The Federal Reserve has started to gradually take its foot off the economic brake to make future economic growth more likely.
Granted, we are in the awkward economic time period when recessions can begin and there are some faint signs of stress, particularly in rising consumer debt levels. However, one can only pretend that our current economy is awful.
Despite so much pessimistic economic pretending, I think the financial markets are pretending that there is not a single worry in the world.
US large company stocks continue to set sporadic record highs, stock traders continue to pay more per $1 of a company’s projected future earnings, and bond traders seem to be pretending that credit risk is no longer a real risk. And all of this is occurring while geopolitical risks are arguably at their highest level in a generation.
The reality is that what other people pretend directly impacts our investment account values which we then often mindlessly accept as reality. That is not to say that your monthly statements are inaccurate. They very accurately reflect what the pretenders are willing to pay for your investments at that moment.
However, they may not accurately reflect the true long-term underlying value of your investments if reality unfolds differently than the pretenders currently predict. Sometimes the pretenders are too optimistic, and your future returns will be muted. Sometimes the pretenders are too pessimistic, and your future returns will pleasantly surprise you.
The best solution to coping with such persistent pretenders is to know your own reality and the goals you are personally trying to reach. That allows you to put the pretenders in perspective, develop an appropriate investment risk budget, and implement a realistic financial plan for your family’s future.
This just happens to be how we have been helping our clients for almost forty years.
Quote of the week: Mark Twain: “October. This is one of the peculiarly dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August, and September.”
