January 2019 Outlook

Wag the Dog

A 1997 dark comedy starring Dustin Hoffman and Robert DeNiro, “Wag the Dog” was a film in which a Hollywood director and a spin-doctor collude to fabricate a war in order to distract voters from a presidential sex-scandal. Hilarity ensues. Of course, the irony was that the movie was released just two months before an actual sex-scandal erupted.

The movie popularized the much older English idiom which essentially describes a disconnect between cause and effect. We spent the first two weeks of this New Year scrounging for a theme for this, our first Outlook of the year, given the market gyrations of the previous quarter. Settling on the Wag the Dog expression gives us at least some contextual basis to talk about a period of market schizophrenia. The expression itself, of course, refers to larger events being driven by seemingly smaller, less significant factors having outsized influence (the “tail wagging the dog”). We became familiar with many corny Wall Street sayings in the nascent stages of our career—often handed to us from grizzled veterans (or so we recall). One of these was the advice: “Don’t let the tax-tail wag the dog”. It seemed sensible enough. Do not allow tax considerations to be the primary driver of your investment decisions. But in the decades since we have unfortunately born witness to enormous wealth destruction in a (thankfully small) handful of clients who refused to realize capital gains because they did not want to pay taxes—only to see those gains evaporate and be left with a large capital loss (and a significant change in net worth as a result). Here’s another corny Wall Street saying; “Markets tend to take an escalator up but take the elevator down”. Funny how the corny sayings often ring true (some others include: “Buy the rumor, sell the news”, “Sell in May, go away”. I have more…).

But this isn’t about taxes. This is about cause and effect—or effect and cause. Chicken and Egg stuff. Is the stock market predicting the economy? Does the economy justify the stock market moves? Can the immediate economic future be that drastically different from the recent past? Throughout 2018, we have tried to lay the cards out as we have seen them; discounting some themes which get the most press, and perhaps trying to emphasize little published factoids. Over the last 18 months, regular readers will recall our discussions of narrowing market activity. That is, more and more money being concentrated into fewer industries—and ultimately into a handful of stocks. FAANG anyone? We even compared and contrasted the late ‘90’s market structures to contemporary situations. Our late-August client-review synopsis expressed some reservations about the longevity of major index returns being driven by only a handful of stocks (excerpt below):

Having these misgivings justified by a sharp market correction is of NO solace as financial advisors. We are market participants as well as investors. We are not market timers and certainly not market cheerleaders. Objectivity is our trade, and frankly, how we earn our keep.

Objectivity itself seems to be a fleeting thing in the digital age. Just a couple weeks ago we marveled with a colleague over the stunning about-face done by a certain financial-news pundit who spent an entire four-hour segment interviewing “experts” about whether the recession would begin in February or March (not if a recession was imminent, but when). 24 hours and one Fed comment later, she asked, “none of this really matters anymore, does it?”. It may seem that the media’s job is to blow the wind harder in the direction it is already blowing. Beware the short-term shifts in the breezy narrative if you are taking your ques from this quarter.