Driving With the Rearview Mirror

Capital Markets Outlook offers perspective on the global economy and asset classes with insight on market history.

Jason Vaillancourt is a Global Macro Strategist on the Capital Market Strategies team. He provides in-depth global macroeconomic research to Putnam clients and the broader financial community.

  • After a CPI surprise, central bankers want their inflation-fighting efforts to be taken seriously.
  • The real interest rate has only recently turned positive, making policy its most restrictive since 2007.
  • Wide-ranging opinions on the state of the economy and business cycle point to a possible market inflection.

There are periods of time in the investing world when contradictions and disagreement among “experts” run rampant. Often, those periods tend to coincide with inflection points in cycles, although you only really know that with the benefit of hindsight, in my opinion. My two decades of experience managing multi-asset portfolios reinforced the following first principles in times of stress.

  • The way to compound wealth and give investors the best chance of success has remained unchanged:
    • Be a little bit more right than wrong.
    • Try and structure positions so the magnitude of wins is larger than the magnitude of losses.
    • Ruthlessly exploit diversification wherever you can find it.
  • And while we know that valuation is a poor timing tool, over a long enough horizon, it is undefeated.

We chafe when we hear pundits say things like “You can’t time the market.” Surely, if one is measuring success over days or weeks, that is probably true. But for those who are long-term investors, and not traders, valuation remains a compelling tool.

Valuations provide helpful signals of long-term stock returns

Valuations provide helpful signals of long-term bond returns