Today’s New Narrative
By Michael McKeown, CFA, CPA - Chief Investment Officer
Last year Nobel Prize-winning economist Robert Shiller wrote Narrative Economics. It talks about how simple stories drive the economy and details that narratives can influence how people invest, save, and spend. These stories contribute to the booms and busts the economy experiences over time.
Examples of stories can range from the tech bubble, to the housing bust, or even all the way back to the Great Depression. But hindsight bias teaches us that many of these stories are so much easier to identify after the fact.
“Life is a picture, but we live in a pixel.” – Wait But Why
In day to day life, we are bombarded with news stories, fed through our phones, laptops, and TVs. But positive stories do not get the attention and eye-balls news media needs to sell ads. Negative stories grab our minds because it is a survival mechanism we evolved in order to avoid threats. This was great for our ancestors when running from predators but not as much today with the constant pinging of our phones. The following from the Wall Street Journal accurately details how our minds are wired:
“Our minds and lives are skewed by a fundamental imbalance that is just now becoming clear to scientists: the negativity effect. Also known as the negativity bias, it’s the universal tendency for bad events and emotions to affect us more strongly than positive ones. We’re devastated by a word of criticism but unmoved by a shower of praise. We see the hostile face in the crowd and miss all the friendly smiles. We focus so much on bad news, especially in a digital world that magnifies its power, that we don’t realize how much better life is becoming.”
There were several stories in just the last 12 months that drove market prices. It started with the Federal Reserve raising interest rates, then the trade war, then the inverted yield curve, then impeachment. Most of these events were painted as negative narratives at the time. The market shrugged these off for the most part and continued rising throughout 2019. (Of course, that has a little hindsight bias thrown in. Markets could have also gone the other way, and likely will one day. The reason will be obvious, after the fact).
The geopolitical risks escalated last week with the U.S. strike killing Iranian General Soleimani. While the human and political side of this discussion in the Middle East is magnitudes of more importance, capital markets will invariably be affected as well.
Following the strike, oil prices rose sharply above $70 per barrel. Stocks dropped slightly but remain near all-time highs. Bond prices rallied on the news as yields fell. Safe-haven money flows went to gold. We will continue to monitor the news trends, in addition to the valuation levels across asset classes for possible entries and rebalancing.
With the turning of the page to a new year comes Wall Street forecasts of what they see for the year ahead for stock prices and bond yields. We find it much more valuable to have a plan to respond to price action (to the up and downside), rather than giving point estimates which invariably turn out incorrect. In this way, risks can be framed as potential opportunity.
Kicking off the new year is a great time for reviewing the actions we control. Is the Investment Policy Statement correct for my financial situation? Are there tax planning items to consider for 2020? Is there a way to increase the savings rate? Am I getting the big purchases right, like houses, cars, and education? Is there anywhere to improve current services or costs through insurance, mortgages, banking, etc.?
Looking at personal financial decisions through this lens lets us individually shape the narrative, instead of the outside voices. We can focus on what matters for us and our situation. We control the action, instead of the negativity effect. In this way, financial goals become attainable and within reach. It is possible to break though the negativity and change the narrative.
“The negativity effect sounds depressing—and it often is—but it doesn’t have to be the end of the story. By recognizing it and overriding our innate responses, we can break destructive patterns, make smarter decisions, see the world more realistically and also exploit the benefits of this bias. Bad is stronger than good, but good can prevail if we know what we’re up against.” – WSJ For the New Year, Say No to Negativity
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Marcum Wealth, or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Marcum Wealth. Please remember to contact Marcum Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Marcum Wealth is neither a law Firm, nor a certified public accounting Firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Marcum Wealth’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request. Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Marcum Wealth account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Marcum Wealth accounts; and, (3) a description of each comparative benchmark/index is available upon request.