The turning of the calendar is a good time for reflection. Since many in my industry are addicted to displaying faux confidence, let me change things up by discussing a few things I don't know.
I'll start with the surprise collapse in the price of oil. In just six months, oil has dropped almost 60%. This has driven a big decline in the stock prices of many oil and oil-related companies.
This plunge has occurred while the supply of oil has remained steady and the overall demand for oil has barely budged. In other words, the global oil market is largely in balance. Yet, the sentiment about oil prices is bad, to say the least.
I smell a longer-term investment opportunity in oil's decline. However, it is wrapped in a great deal of near-term uncertainty. This is the type of setup — a classic near-term/longer-term trade-off — that investors avoid like the plague.
What I don't know is exactly when oil prices will rise again, let alone stabilize. If I knew, I’d be making even larger investments in oil-related companies today. The probable right action, in response to this uncertain opportunity, is to act with moderation and gain comfort knowing that I am likely buying low.
Next, the recent decline in interest rates continues to baffle investors. For readers who aren't paying attention, here is a quick and interesting trip across the globe.
In Japan, their government can borrow for a decade at 0.25% per year. In Germany, they're now only paying about 0.45%. And, amazingly, even Italy and Spain pay less than we do today! The U.S., the cleanest shirt in the dirty laundry of the global economy, pays a paltry 1.75% for the next decade. A decade is a long time to earn that little! This environment is nothing less than astonishing.
What I don't know is how these interest rates make sense in a supposedly healthy economy. Remember, this is an economic backdrop that currently supports near-record stock prices.
Speaking of stocks, I had a recent call with a well-known investment strategist from a national brokerage firm. When the conversation turned to the fact that stock prices are expensive — if one accepts time-tested historical measures of value, that is — he quickly dismissed these indicators as having no predictive power for near-term investment returns.
What I don’t know is how long the stock market can seemingly defy gravity. As a result, the probable right action is to recognize the wisdom in reducing risk by hedging a portion of my bets. After all, I do know that price is what one pays and value is what one gets!
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Jason P. Tank, CFA
Front Street Wealth Management
310 W. Front Street Suite 411
Traverse City, MI 49684
Front Street Wealth Management is the independent, fee-only, fully-discretionary wealth advisory firm for individuals, families and trusts who value proactive management of their investments and a deeper confidence in their wealth.