Video Newletters: Insights and Observations

Everything listed under: John Finley

  • November 2018

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    Kevin - Greetings, Kevin Coyle and John Finley, November 14th, market update. So, John we had an October decline which is not a great shock.

    John - October's the most volatile month on average and when there's volatility, stocks tend to go down. And stocks around the world went down in October, not just the U.S., down about 7%.

    In the U.S. value was down about four, and growth stocks were down about 9%.

    Kevin -So, year to date, we've had a couple of drops of plus or minus 10%, it seems to be in a trading pattern. The comment you made earlier though, when you look at the net returns year to date, plus or minus 3%, a lot of that is the growth component of the market.

    John - We still have large cap growth stocks leading the way, Amazon, Microsoft, Apple in particular, but for most of the other stocks are trading well below their all time high, 10%, even 20% below their all time high.

    Kevin - So, some of the value managers that you talk to are seeing some opportunities-

    John - Definitely. Yes, there's cheap stocks out there to be had.

    Kevin - We're also seeing the same thing in the international emerging markets significantly.

    John - Sure. Relative to the United States, valuations overseas are much more attractive.

    Kevin - So, a diversified portfolio year to date is not going to be showing the numbers that a portfolio that's concentrated in the index or concentrated in the growth stock area, because international emerging market's down, value is down, bonds slightly down. So, you're not going to see quite two to 3% across the portfolio structure, but you're seeing more of the opportunity, at least the managers are saying this, that you want to run in the areas that haven't seen the momentum.

    The bond market, any comments there?

    John - Still have a very flat treasury curve with the Fed on target to raise again in December, and probably a couple more times at least in 2019. Long end of the curve stays a little over 3% on the 10 year, which tells me that long term investors are not seeing inflation as a big risk right now.

    Kevin - Post election, the market seems to have digested that well, having a divided house in Senate normally is a positive thing, in terms of capping spending perhaps. Any other thoughts there as we go into the new year?

    John - Well, the economy is still very healthy, unemployment is still very low at 3.7%, the lowest it's been in 50 years, growth world-wide is slowing a bit, China in particular, but still 3.7% is the estimate for next year world-wide. So, profitability in corporate America is still very, very healthy.

    Kevin - So, maybe we get some positive news on the trade war front and tariffs if you will. So, stay the course. Until next time, enjoy. 

  • August 2018

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    Kevin Coyle: Greetings. Kevin Coyle, John Finley, Augusts 2018 update. Markets have almost recovered to their January of 2018 peaks.

    John Finley: We're up 7 1/2% overall in the U.S., and that's led by large cap growth companies again. Tech's up 12% this year, large cap growth companies up over 10%. Internationally, the story's not so good, down slightly negative in international developed and emerging markets.Kevin Coyle: So total return portfolio with some international emerging markets, bonds, and some of the tech, then you should be up around 2 to 3% so far this year. The earnings backdrop?

    John Finley: Earnings are strong. They're still, with 80% of the companies reporting, over 25% increase in earnings per share. Top line growth is good, year over year over 9% for S&P 500 companies.

    Kevin Coyle: So a lot of the talk has been this rally has been for so long, and the yield curve is bordering on inverting, with the short term being at 2 1/4%, the 10 year bond being around 3%. So even though people have been worrying about inflation, the bond market seems to be saying something different.

    John Finley: Yeah, we've got the Fed on one end, raising rates because of a fear of overheating economy, and inflation but they're doing it in a measured way. We expect them to raise two more times to bring the Fed funds rate up around 2 1/2%. The investors at the long end of the treasury curve however, the reason I think that the yields are still so low is that they're not convinced in that continuing growth story or that potential inflation story.

    Kevin Coyle: Now whether that leads to a recession remains to be seen. But with the global backdrop and generally the sentiment as well as corporate management seems to be positive as we move going forward. Tariffs?

    John Finley: Well, that's the big news item this year. It's creating a lot of volatility and uncertainty in the markets. Although the stock market so far in the U.S. has been kind of shrugging that off-

    Kevin Coyle: In earnings calls, management has been expressing that they felt that it's not material issue as well as that prices could be passed through.

    John Finley: Right. So, what will yet to be seen is a lot of saber rattling in the international arena, between the Trump administration and these other countries, especially China, which has considerably more to lose in a trade war-

    Kevin Coyle: Well, they export $500 billion to us and we export $175 billion to them. So they would seem to have more skin in the game, put this all together, cautiously optimistic as we move forward.

    John Finley: Right. I agree with that.

    Kevin Coyle: Midterm elections coming up. Summer in its last month, seems like summer is ending on August 1st these days, is a bit depressing but it beats subzero temperatures. Until our next update, see you in September, October.

  • May 2018

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    Kevin: Hello, John Finley, Kevin Coyle, May 2018 market update. Maybe start with a quick recap of how we've done year-to-date, John, and over the last year.

    John: Year-to-date, we're about flat, but year-over-year, we're still up double digits, about 14% in the U.S. The market hit a new high on January 26th, but we're down about 6% from that.

    Kevin: We've had a lot more volatility than usual. We were kind of lulled into a false sense of security maybe in 2017 with very, very little fluctuation and mostly up days, but this would be more normal.

    John: Right.

    Kevin: If you look back historically, we're going to have a lot more of these types of down days during the course of the year. The global backdrop, growth-wise, what does that look like?

    John: It's still very supportive. We have global, synchronized growth. Maybe 70% of developed countries are in a pretty strong expansionary economic situation, which is good and low inflation. So it's a very supportive economic backdrop.

    Kevin: So there are some fears out there, which we'll talk about in a second, but the correction that we had, maybe 6% down from the lows combined with increased earnings, part of that from the tax cuts, but from historical measures, the market would appear to be fairly valued at this point in time.

    John: Right. The forward price earnings we're right about at the average, long-term average, and we're expecting earnings in the U.S. to be up about 20%, year-over-year, 25% on earnings per share basis, and the revenue top-line growth is still pretty healthy. It's 7%.

    Kevin: So we talked about potential fears out there of inflation, which we'll talk about in a second. The other one, which has been since this recovery started, it's been a long but slow recovery. A lot of people think, "Well, it's nine years." It's what, the second longest expansion that it can't have legs much longer. It's got to be running out soon. What are your thoughts on that?

    John: Well, this has been a different recovery coming out of the financial crisis than the other post-war recessions that we've had. We bounced back much quicker before, and we've just been plodding along at about 2% or so real GDP growth. And the reason for that is we've got the two components of GDP growth are population growth and productivity, and both of those are relatively low rates of growth right now.

    Kevin: So if you look the numbers, the length of the expansion has been long, but the degree of the recovery has not been as significant.

    John: Right. We’re seeing unemployment continue to drop, and that's creating some issues, maybe some labor shortages in certain industries.

    Kevin: But we're not seeing that really show up in the inflation figures.

    John: Not yet.

    Kevin: So we're afraid about the length of the recovery, and we're afraid about inflation, but we're not really seeing signs.

    John: Right.

    Kevin: That those are rearing their heads this year.

    John: Oil is up to $70 a barrel now, and lumber prices are up, so there are indicators that inflation may be on the rise. The Federal Reserve said recently that their inflation in the U.S. is approaching their 2%.

    Kevin: Well so the Fed had been taking precautionary action, and they've been raising short-term rates, so you have that going on. You also have the Federal Reserve trying to unwind its balance sheet from the quantitative easing from the bonds they've purchased since the recovery. And then, you also have record deficits on the horizon, and this all adds up  as potentially inflationary as well, correct?

    John: Well, certainly, it's going to put pressure on interest rates as the Fed unwinds the balance sheet, and the government has to sell bonds to finance a trillion dollar deficit for the next five years. But the bond market is not really reacting yet to any higher inflation expectations. And, in fact, it may be a bit concerned the Fed will overshoot.

    Kevin: So you have this balancing act going on, where you have potential inflation, but the bond market's saying that it's not seeing it, so rates have gone up, but the yield curve is still relatively flat. So the bond market's saying that it's seeking more potential of recession as opposed to inflation. But then you put that together with the global backdrop. The earnings and the economic climate is still positive, so it's kind of a different recipe of this Goldilocks scenario from couple years ago. It's all kind of mixing together, where it's kind of steady as you go kind of a scenario.

    John: Right. Oh, yeah, it doesn't appear that, from what we can tell, the indicators that we watch, that there's a recession around the corner, certainly. And the backdrop, again, is very supportive from a global economic perspective.

    Kevin: With all that being said, stick to your plan, but the volatility, I would imagine, will continue to be present because there is some uncertainty as to some of these issues that are out there. So those are the things we'll be looking for going forward. Until our next update, enjoy.

  • November 2017

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    Of Pigeons, Information & Interest Rates

    Have you ever noticed how pigeons walks? Their heads bob back and forth with each step they take. Although I consider myself a recreational bird watcher (as opposed to an actual birder), I never gave this behavior any thought until I read a fascinating book: Storm in a Teacup: The Physics of Everyday Life, by physicist Helen Czerski. The author explains that this movement is necessary because the bird cannot process the changing visual scene fast enough as it walks. Czerski writes: “The head stays in the same position throughout the step, so the pigeon has more time to analyze this scene before moving on to the next one.”

    I can sympathize with the pigeon, since I often feel like there is way too much information available to me every day from numerous sources, all clamoring for my attention. After all, we live in the information age. And yet we must attempt to sort it out; to make some kind of sense out of it all; to discern the signal from the noise.

    One of the five guiding principles of our investment philosophy at Coyle Financial Counsel is that investment decisions should be based on information, not emotions. And because we also seek to be evidence-based in our investment process, gathering and analyzing information is essential.

    This will be the second Commentary in a row to discuss interest rates, but this time I want to address a point made in the video, that the yield curve is flattening. A yield curve (also known as the term structure of interest rates) plots the yield-to-maturity of an issuer’s debt securities by date of maturity. We want to answer the question of whether there is useful information in the shape of that curve.

    Here is a plot of the term structure of U.S. Treasury debt for two different dates:

    The curve dated January 2, 2014 is much steeper than the curve we have now. We know from last quarter’s Market Observer Commentary that inflation expectations are a key determinant of the general level of interest rates and that the Federal Reserve influences what short term interest rates will be through the market activities of the Federal Open Market Committee. Inflation expectations at the end of 2013 were higher than they are today.

    Besides inflation, there is one other interesting historical feature of the shape of the yield curve which might give us information as to the future health of the economy. The measure we use for this is called the term spread, the yield difference between longer and shorter maturities. If we compare the current yield-to-maturity on the 10-Year maturity Treasury note (currently at 2.37%) to the 2-Year maturity (1.76%), the current term spread is 0.61%. This is the lowest reading we’ve seen in almost 10 years, since just before the Global Financial Crisis:

    If you look closely at this chart, notice what happens to the term spread just before the economy slips into an economic recession (the gray vertical bars): the spread turns negative. This is called an inverted yield curve and it has been an almost infallible leading indicator of economic recessions in the U.S.

    The intuition around using inverted yield curves as a recession indicator is as follows: an economy in significant decline tends to exhibit falling inflation, causing long term rates to fall along with falling inflation expectations. Short term rates, on the other hand, lag behind, anchored as they are by the Fed until it decides to start lowering them to stimulate the economy as it implements monetary policy.

    Another theory used to explain this is called the Expectations Theory. The intuition here is that longer rates can be thought of as a series of future short term rates strung together. If investors believe that the Fed will start lowering short term rates in the future, they will start buying more long term securities to lock in higher yields, which gradually has the effect of lowering long term rates (this is because bond prices and yield are mathematically inversely related).

    A declining (but still positive) term spread is certainly not cause for alarm. A quick glance at the graph shows many instances since 1976 where it declined but failed to invert. It is just one of many economic variables that we monitor as part of our investment process. While recessions are notoriously hard to predict, we don’t believe the U.S. is in any immediate danger of slipping into one.

    As we mentioned last quarter, we are not in the business of predicting the future course of interest rates. But, like the pigeon, we try our best to process the continuous flow of economic and market information available to us, without getting too overloaded. Even so, trying to discern the signal from all the noise is easier said than done.

  • August 2017

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    What’s (Not) Up With Interest Rates?

    Credit is the lifeblood of any healthy economy and the price of credit (or the cost of borrowing) is measured by the annual rate of interest charged. There are as many different rates of interest as there are types of credit available. For example, consider borrowing from a bank to purchase an automobile. If you’re fresh out of school and newly employed, the interest rate on your auto loan might be in the double-digits. But if you have a long, well-established credit history, you might be able to buy a new car with zero percent financing.

    Or, consider what sovereign governments have to pay investors to borrow in the capital markets. The United States can borrow for ten years right now at an annual rate of 2.19%. Brazil, on the other hand, must pay investors close to 10% per year to borrow for ten years.

    How are interest rates set? Interest rates are established like any price, by market forces, via the supply and demand for loanable funds (there is one important exception which we will discuss in a minute). Think about that bank making an auto loan. They have several things to consider when deciding to extend credit to someone: (1) the creditworthiness of the borrower, (2) how many years to pay the loan back, (3) the cost of funds that the bank has to pay to depositors, and (4) the rate at which the purchasing power of the currency declines over time (the inflation rate).

    Let’s focus on the last point, inflation. Savers and bond investors hope to earn income on their funds at a rate that exceeds the rate of inflation, otherwise they lose the purchasing power of the income stream. Therefore, one component of the interest rate setting process by the market must consider what the future rate of inflation is expected to be.

    The last slide in the Market Observer video showed that there has been a very close correlation between the US inflation rate (as measured by the CPI) and market interest rates (in this case, 3-month Treasury Bills). While other things come into play when thinking about how interest rates are set, such as credit quality and the term to maturity, inflation expectations are a key consideration. It is the reason that the US can borrow at just over 2% for ten years while Brazil must pay almost five times as much: inflation in the US is below 2% compared to almost 9% in Brazil.

    This is why any discussion of the future course of interest rates must take into account inflation expectations. The US Federal Reserve, through Monetary Policy, started targeting core inflation at 2% in 2012. Since that time, inflation has struggled to get anywhere close to 2%, with the most recent reading at 1.7% (July, 2017). This has been a conundrum for many economists, policy makers and market participants, particularly since unemployment is now at a low 4.3%. Even though the US economy is barely growing at a 2% real annual rate, some expect wage pressures to start pushing consumer prices higher. So far this has not happened.

    Persistent low inflation has created a lively debate within the Fed’s Federal Open Market Committee (FOMC). The FOMC decides where to set the one interest rate that is not market determined, the Federal Funds Rate (the overnight lending rate on bank excess reserves). The Fed has been trying to “normalize” the Fed Funds rate recently after almost a decade of keeping the rate near zero since the depth of the Great Financial Crisis of 2007-2009. Even though the effective Fed Funds rate has now been raised to over 1%, the market is pricing in only a 36% chance that the Fed will raise the Fed Funds rate for the third time this year in December. Meanwhile, the bellwether 10-year Treasury yield has dropped again to 2.19%.

    For some time now, there has been much talk about the prospect of rapidly rising interest rates, particularly since the Fed first raised the Fed Funds rate in December, 2015, from zero to 0.25%. But the Fed controls only one rate, the overnight bank lending rate. They do not set mortgage rates, or auto loan rates or other bank lending rates, much less the yields on longer term treasury, corporate or municipal bonds.

    While we are not in the business of predicting the future course of interest rates, our guess is that as long as inflation stays low and the economy limps along at an average 2% real GDP growth, long-term rates are more likely to stay low than to rise significantly from here.

  • May 2017

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    When it comes to stock investing, investors often ask if is it better to hold a well-diversified portfolio of hundreds of stocks or a concentrated portfolio of, say, 20 or 30 stocks? The answer may not be as clear-cut as you think. Let’s look at what academic research might have to teach us.

    The Case for Diversification

    The essence of diversification is captured by the old adage that we shouldn’t put all of our eggs into one basket. Investing in capital markets involves the risk of loss, so we should spread our investable wealth across many securities. In support of diversification, research provides some very sobering facts about investing in stocks.

    One study looked at the stocks that composed the Russell 3000 Index from 1980 to 2014. The index includes about 98% of all listed stocks in the U.S. The author found that two-thirds of all the stocks that were included in the index over those years actually underperformed the index itself. In fact, 40% of the stocks produced negative absolute returns over their life-span.¹

    Another study was even more ambitious, looking at the performance of all listed stocks from July of 1926 to December of 2015, a total of almost 26,000 stocks. The author summarized his findings by writing that “the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks.” In fact, he found that only 86 stocks account for over half of the roughly 32 Trillion dollars in stock market wealth creation. Worse yet, he found that 58% of those 26,000 stocks returned less than one-month Treasury Bills over their life-span (The median life-span of a stock was seven years).²

    We are often surprised to hear that stock returns are driven by just a handful of stocks. For example, in 2015, the S&P 500 Index returned just 1.38%. The top 10 performing stocks that year included the four so-called “FANG” tech companies, Facebook, Amazon, Netflix and Google (now known as Alphabet). According to another research piece published early in 2016, removing the impact of these 10 stocks would have reduced the index returns by 3.7% that year. The author then looked at the S&P 500 Index annual returns over a longer period, from 1995-2014, and found that the 2015 results are actually quite normal. The average performance impact of the top 10 performing stocks over that 20-year period was 4.1%.³

    In summary, the implication of what we have discussed so far is that we should diversify to spread the risk of owning losing stocks while increasing our chance of owning the relatively few stocks that will survive and grow in value.

    The Case for Concentration

    The most obvious reason in favor of concentration is that every successful business in the world, big or small, was started by somebody who had a vision and, in many cases, were willing to risk everything. This is wealth creation as the fruit of the entrepreneurial spirit. It is the opposite of diversification and the risk of failure is high.

    We call this idiosyncratic risk and finance theory says that a sufficiently diversified portfolio can eliminate almost all of the idiosyncratic risk among the different stocks in the portfolio. The risk that we are left with cannot be diversified away, and this is called market or systematic risk. The reward for bearing market risk is the equity risk premium over Treasury Bills that historically accrues to long-term stock investors. In addition to the equity risk premium, investors have historically earned additional long-term premiums for bearing the risk of owning small cap stocks, low volatility stocks or value stocks, for example. This is called factor-based investing.

    In 2015, Fidelity Investments issued a research piece titled “Does the Number of Stocks in a Portfolio Influence Performance?” They analyzed the returns of U.S. large-cap equity mutual funds over the 20-year period from 1994-2014 and concluded that there was no evidence of a meaningful relationship between the number of stocks in an actively managed portfolio and its performance. They added that portfolios with either higher or lower number of holdings have beaten their benchmarks with the same success rate.⁴

    Recently, research was presented at a conference sponsored by AQR Capital Management which compared these two approaches to equity investing. The first was called Quantitative, characterized by well diversified, rules-based, systematic, factor-based investment approach, designed to capture various market and factor risk premia. The second was called Fundamental, which relied on individual stock managers using a “Best Ideas”, thematic approach to managing concentrated portfolios, designed to capture more idiosyncratic sources of return, such as mispriced stocks.

    They compared the investment performance of the top 25% of U.S. large-cap core managers, both Quantitative and Fundamental, from December of 2000 to December of 2015. They concluded that both groups had identical excess returns after fees of 1.7% per year and that combining the two approaches could actually improve the risk-adjusted returns versus using just one of the approaches alone.⁵


    We conclude, therefore, that there are advantages to using both a diversified and a concentrated approach to investing in equities. At Coyle Financial Counsel, we utilize a “Core and Satellite” investment process to capitalize on this idea. We use a well-diversified, quantitative, factor-based approach for our core portfolios while using certain concentrated “Satellite” stock managers who seek to outperform using a fundamental, “Best Ideas” approach. We believe that this combination will help our clients achieve their long term financial objectives.

    John G. Finley, CFA

    May 18, 2017


    1. “The Agony & The Ecstasy: The Risks and Rewards of a Concentrated Stock Position”, by Michael Cembalest, J.P. Morgan Asset Management (“Eye On The Market”, J.P. Morgan, 2014)
    2. “Do Stocks Outperform Treasury Bills?”, by Hendrik Bessembinder, Dept. of Finance, W.P. Carey School of Business, Arizona State University, Draft: February, 2017, (Accessed 5/8/2017)
    3. “SNAFU: Situation Normal, All-FANGed Up”, Cliff Asness, AQR Capital Management (1/11/16), (Accessed 3/13/17)
    4. “Does the Number of Stocks in a Portfolio Influence Performance?” by Michael Hickey, CFA, et al, Fidelity Investments (Leadership Series / Investment Insight, FMR LLC, 2015)
    5. Author’s notes from attending AQR University Event, Chicago, Illinois, May 9, 2017, Sponsored by AQR Capital Management
  • February 2017

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    Passive versus Active Investing

    The recent unseasonably warm weather and complete absence of snow this year in the Chicago area has been a very pleasant surprise. Flowers are pushing up through the soil and many migrating bird species have arrived a bit earlier than normal.

    What’s not so surprising is the ongoing debate in investment circles about the relative merits of active versus passive investing. Passive investing refers to the use of mutual funds or exchange traded funds that replicate well-known market indexes such as the S&P 500 or the Russell 3000. Active equity managers attempt to beat the market by offering superior stock picking.

    Investing in passive, index-based strategies has grown enormously in popularity in recent years. Last year alone, Morningstar estimates that $262 billion moved from active to passive U.S. equity funds (1). This is understandable: Index-based funds tend to have lower fees than active funds (1) and the average active manager does not outperform its index benchmark after fund fees and expenses (2).

    While the trend from active to passive seems to be showing no signs of slowing down, although, in theory at least, there is a limit to how far it can go. The reason is that indexes use only one characteristic to rank the constituent stocks: price times the number of shares of a company’s stock. Market value, of course, depends on price. And how are prices determined? Buying and selling of those shares on stock exchanges done by active managers.

    The price of a share of stock is a critical piece of information for skilled active managers, especially value investors. Value investors, such as Warren Buffett, seek to buy stocks that are undervalued and cheap relative to other stocks. They analyze the fundamentals of a company to arrive at an estimate of what the intrinsic value of a stock is, then compare that to the current price. If there is a sufficient discount (or margin of safety), the value manager purchases the stock in the hopes that eventually other investors will agree with that valuation and bid the price up to its fair value (or higher).

    Academic research has consistently shown that value investing outperforms growth over long periods of time, though it may underperform growth for shorter time periods. One problem with passive investing is directly related to its sole reliance on price valuation because popular growth stocks will always have a greater weight in the index than unpopular value stocks. Popular growth stocks also tend to have more price volatility.

    This became abundantly clear during the dotcom bubble of the late 1990’s when technology stocks (growth stocks) were everyone’s darling, eventually driving the tech sector to a weight of over 29% of the S&P 500 Index. That bubble ended in a three year bear market, where value investing (buying cheap stocks) outperformed growth (owning popular stocks) seven years in a row.

    While some may worry that our “Early Spring in February” may not end well for the flowers when the freezing weather returns, we need not fear that active managers will be driven to extinction by passive indexing any time soon. Skilled and experienced equity managers who can find quality companies with good fundamentals, purchased below their intrinsic value with a “margin of safety”, should always have a prominent place in every investor’s portfolio. The goal is to grow wealth over the long haul by diversified exposure to the global capital markets, capturing a share of what the market has to offer as cheaply as possible, with less volatility, and avoiding the never-ending parade of popular investment fads.

    (1) Morningstar Direct Asset Flows Commentary Feb. 14, 2017

  • December 2016

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    The human impulse to make predictions about future events is understandable, and is another thing that separates us from the rest of the animal kingdom (along with the need we have for meaning and purpose). I can’t imagine that my pet Border Collie ever worries about where her next meal will come from or if there will ever be another frisbee toss coming her way. But for us humans, there are any number of things we can choose to worry about, and that worry is always focused in the future. Hence, the unending quest to predict things, to reduce or eliminate the anxiety and fear which often accompanies uncertainty.

    I marvel at the accuracy of weather forecasts, the fruit of years of sophisticated meteorological computer modelling, which most of us take for granted nowadays. This benefits us all. But even with such impressive advances in forecasting, we are sometimes prone to put too much stake in expert predictions based on complex statistical models. The recent U.S. Presidential Election stands as a good reminder of this. Right up to the night of the election, most election polls predicted Mrs. Clinton would emerge the victor over Mr. Trump.

    Like many of you, I stayed up to watch the election results. I kept a close eye on the Dow Jones Industrial futures contract. At one point that evening, blue chip stocks were selling off by over 800 points. Now, several days later, as we discuss in the accompanying Market Observer Video, U.S. stocks are up significantly, with certain sectors like financials and industrials up significantly. Why?

    Ironically, we can point to the experts again. Only this time, we’re not talking about political pundits but pundits from the world of investing. The reasoning is simple enough. If Mr. Trump can fulfill certain campaign promises, such as significant increased government spending on U.S. infrastructure improvement projects like roads, bridges and airports, certain industries and businesses will benefit from all that spending. It all sounds so logical. “Investors” then placed bets on those stocks, driving up stock prices, based on that prediction.

    The problem with this line of thinking is that it more closely resembles short-term speculation rather than long-term investing. A moment of reflection surfaces many questions. What will the actual infrastructure spending look like? How quickly will the legislation get passed? Will it involve outright government contracts or funded through individual states? Will it have a private component? How will the architects and construction companies be chosen? How long will all of this take before any of it actually gets counted in the GDP calculation? (Does anyone remember the phrase “Shovel-ready projects”? Google it. It wasn’t that long ago.) Similar questions can be raised about the assumptions underlying the big run-up in financial services stocks.

    The point of all this is to bring us back to something else mentioned in the accompanying video, that stock price valuations in the long run must be anchored to corporate profitability, and not on short-term speculation based on the thinly conceived predictions of so-called stock market “gurus”. It’s the growth in expected future cash flows from businesses that creates wealth in the form of increased stock prices.

    So, the next time I notice my dog staring at me, I can be reasonably sure that she is not worried about how the predicted deregulation and certainty of rising interest rates will benefit commercial banks in the future. She probably just wants me to know that I forgot to feed her (again).