Market Volatility – What the Market Timers Think
by Micah Porter

Financial markets have continued to be volatile over the last few weeks. Whenever that happens, my inbox is overrun with breathless stories in the financial press along with offers from fund managers that claim they have a proven system to navigate the turbulence. Even though we eschew market timing because the evidence skews fairly convincingly against its effectiveness for long-term investors, I still like to read what is being written, particularly to be able to respond to client questions.

With that in mind, in this article I’ll walk through some of the most common indicators used to time the market and discuss their current outlook. Most of these systems use one or a combination of 3 different sets of data which I’ll describe below. Interestingly, in spite of the preponderance of bearish headlines, 2 of the 3 sets of data are solidly in the camp of a continued bull market.

The most common approach of investors who try to time the market is technical analysis. Technical analysis uses information about prices and trade volumes to determine where the market is headed. Of the three most common approaches to divining market direction over the near term, technical analysis has been the most bearish of late. In fact, a number of technical analysts have said that the data hasn’t looked so negative since 2008.

Market sentiment is another approach investors use to time the market, and it – along with fundamental analysis which is described below – points in the opposite direction of technical analysis. Market sentiment is what is known as a contrary indicator, meaning that when sentiment is highest, the market is most likely at a top and vice versa. Interestingly, one long running gauge of investor sentiment recently recorded sentiment at a low not seen since March 2009 indicating that there is likely still a good bit of upside to the bull market.

One final common approach market timers use is what we’ll refer to as fundamental analysis. Fundamental analysis uses a varied set of information, including aggregate market valuations and economic data. Based on this analysis, while valuations in the U.S. are high, the economy appears reasonably healthy. The probability of a recession seems low and as a result, the probability that we are on the cusp of a bear market is low as well.

Elsewhere, economies are less robust, but valuations are lower. Thus, from a fundamental perspective, near term risks of a bear market are higher – and indeed, some overseas markets are already in a bear market – but returns over the medium term are apt to be stronger given more attractive valuations. In fact, some investors that use fundamental analysis – like Morgan Stanley – find themselves on the opposite end of the spectrum from most technical analysts in proclaiming this the best time to invest in equities since the market bottomed in 2009.

Taken in aggregate, the indicators above are far from agreement as to where the market is headed. In fact, in some instances, they reach diametrically opposed conclusions, either proclaiming this either the best or worst time to invest since the early days of the financial crisis. Some set of indicators will prove correct in this market cycle, but those same indicators will likely be off the mark in a future cycle. Thus, the problem with trying to time the market is that the various indicators are often in disagreement and those indicators that are accurate for this cycle will be off the mark in the future. For those reasons, among many others, we avoid trying to time the market and instead focus on building sound, well-diversified investment portfolios designed to meet client needs over the long-term.


Who Wouldn’t Want Advisors to Act in Their Clients’ Best Interest?
by Micah Porter

While markets and the financial press are focused on recent market turmoil and whether or not the Fed will raise interest rates, far less attention has been given to the discussion on Capitol Hill about whether the fiduciary standard should be expanded. As we’ve covered in previous newsletters, a fiduciary standard requires that an advisor act in the best interest of their clients and, as fiduciaries, we think anyone who holds him or herself out as a financial advisor should be held to that standard. Unfortunately, thanks to the political clout of Wall Street, that’s not the case. Current attempts to expand the fiduciary standard are being met with fierce resistance from the industry as well as in Congress, where the issue has broken largely along partisan lines.

Proponents of the fiduciary standard had originally hoped that the SEC would formulate a uniform standard for the entire industry. Unfortunately, those attempts were hamstrung, and the Department of Labor has taken the lead in proposing that advisors providing advice on retirement plans – including both employer plans and IRAs – be considered fiduciary advisors. Those in support of the proposal include NAPFA, the Financial Planning Association, the CFA Institute and the CFP Board, while the opposition includes much of Wall Street as well as insurance companies. They claim that such a standard would limit their ability to serve the middle class and small business because they could not profitably do so. Given that firms that are held to a fiduciary standard have served both client groups for years, one suspects the issue isn’t that Wall Street couldn’t profitably operate under the standard, but rather that they couldn’t operate under the standard and make the sizable profits they currently earn.

While we are fiduciaries and neither we nor our clients would be impacted by the new regulations, we believe they would be good for consumers as well as the industry as a whole. We still see far too many high cost investments – annuities, high commission mutual funds and other investments – that would likely be impermissible under a fiduciary standard. To the extent that regulations can lower the cost for consumers and increase transparency within the industry, consumers and most advisors stand to benefit.