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Optimistic But Some Worries

I’ve always tended to be an optimistic person, especially when it comes to investing. People can say it’s because that’s the industry I work in and the ability for me to continue paying my mortgage relies on me being optimistic (markets going higher).

I think it just comes from an understanding of the markets. Going back to the 1930s, we have only seen two decades with negative annual returns in large cap stocks: the 1930s and 2000s. Those negative annual rates of returns equated to 0.1% per year in the 30s and 0.9% per year in the 2000s.

Twist those numbers as much as you want but, eventually, you will see that these aren’t bad in the big picture. In all the other decades, the lowest annual growth rate has been 5.9%… which occurred in the 70s. Every other decade saw greater gains.

Now for the curveball

Despite being optimistic, I do find times where things worry me. The difference is that the worrisome things cause me to evaluate and tweak positions, rather than overreact and panic.

The other day in our Investment Committee meeting, we decided to go around and talk about headlines (either that have happened or could occur) that scare us. I felt that this was necessary because things had seemed to get too rosy and we need to be sure we are aware of possible threats.

The theme for the past 12-18 months has continually been that capex will spur our economic growth… this has yet to be seen—at least in my eyes. And this is what scares me.

In order for us to see growth in the economy, we are going to have to see companies investing in the future… making big purchases.

As companies make these big purchases, we will see demand rise for new employees and this will ultimately lead to wage inflation. All of this is a recipe for nominal growth… which is what we need.

One of the first cogs hasn’t come yet. Capex hasn’t seen the bump that everyone keeps talking about. Companies continue to be lean (seeing productivity with fewer people).

From 2012 to 2013, we saw cash for the companies in the S&P 500 grow by 8.2%… capex grew by only 2.4%. Companies continue to build up cash levels and continue to show resistance in making those large expenditures that we need to fuel economic growth.

People continue to suggest that this surge in capex will spur our economic growth, but I have to say that right now that isn’t happening. And I was one of those people saying this before.

Eventually, we will see capex accelerate and it will be great for our economy, but right now this seems like something people believe in, but we just aren’t seeing yet. And if we don’t see it in the near term, it could upset investors down the road.

(All data used within The Capital Course was provided by Ned Davis Research)


 

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