As an investor, what do you prefer: certainty or uncertainty?
Certainty, of course. We all do.
When things seem certain, the future looks bright and we embrace risk-taking. When things seem uncertain, it’s hard to imagine things ever getting better, and we shun risk at all costs.
But is there really such a thing as a certain environment when it comes to investing? No. There is always risk in markets, even if you can’t see it, and by extension, there’s always uncertainty.
It is only our perception of risk that changes.
If the recent past is a calm market filled with good news, we perceive things to be quite certain. If the recent past is a volatile market filled with bad news, uncertainty is deemed to be high.
How are investors feeling today?
Quite certain.
Volatility over the last year has been lower than any period in history.
At the same time, performance has been well above average, leading to one of the highest risk-adjusted return environments we’ve ever seen.
Naturally, investors are feeling pretty good about all of this, with one measure of sentiment (Investors Intelligence) recently hitting its most extreme level since 1987.
A summary of the prevailing thinking today is as follows:
- Recent economic data has been strong -> it will continue to be strong, there’s no risk of recession.
- Earnings have been strong, are at new highs -> there’s no risk of a slowdown in earnings growth.
- Tax cuts are coming -> that will have a dramatic positive impact on growth and earnings.
- Global Central Bank policy remains extraordinarily easy -> that can only be good for markets.
Let’s address each of this from the standpoint of certainty about the future.
Economy
The economic data has been pretty good this year:
- Unemployment Rate at its lowest level since 2000.
- Jobless Claims at their lowest level since 1973.
- 85 consecutive months of payroll growth, longest streak in history.
- Manufacturing sentiment highest since 2004.
- Consumer Confidence highest since 2000.
