Taken For A Ride

As investors, sometimes it feels like we're being taken for a ride by market commentators and officials. Emotions play a large part of that, as well, which

means investors need tools to learn to govern their passions. This week's inspiration for the musings is the TV show "Taxi." Here's some trivia about the show:

• This show aired for 5 seasons, from 1978 to 1983. This show was one of the first on television to switch networks. In 1982, ABC cancelled the show. There was a bidding war for the show between HBO and NBC, with the latter winning out.

• According to writer, producer, and director James Burrows, when Danny DeVito auditioned for the role of Louie De Palma, he threw the script on the table and said, "Who wrote this $@#&!" He was hired on the spot as he encapsulated the character.

• After the 3rd season, director James Burrows and writers Glen Charles and Les Charles left the series to create the show "Cheers." Over the next few seasons, most of the "Taxi" cast made appearances on "Cheers" and vice-versa.

• The show was nominated for 34 Emmys and won 18. One of the more memorable characters on the show, Reverend Jim Ignatowski (Christopher Lloyd), is 32nd on TV Guide's list of 50 greatest TV characters.

Here's what we've seen so far this week..

What Does A Yellow Light Mean? To hear market pundits, one would think we're headed for recession again. In fact, investors have been whipsawed by the

so-called pundits for the better part of the last two years. It reminds me of the great scene in "Taxi" when the cast tries to get the Reverend Jim a driver's license (see the clip below). Based on the 10-year Treasury Yield, pundits have made 7 different market predictions since the beginning of 2023. What was the return of the S&P over that same time frame - up only 51.8%. If investors governed their emotions and stayed invested, the pundits wouldn't have a job.

The reason why this is relevant is that the 20yr Treasury auction disappointed on Wednesday, with less demand than expected. However, despite the nashing of teeth, some historical context is needed. First, the auction wasn't that bad, just falling short of $16 bil. Auctions in-and-of-themselves don't tell you very much. Second, some history is important, as well. The 20-year Treasury auction has faced challenges establishing a consistent investor base as the auction was suspended in 1986 and did not occur again until being reintroduced in 2020. The 10-year and 30-year Treasury auctions tell us much more about the state of the bond market as those securities have much more broad and stable demand dynamics. As we know, any event on any day can be turned into a warning signal. The "yellow" light signaled by market pundits isn't always a reason for caution or, to "slow down."

Don't Get Taken For A Ride. Equity markets were broadly higher Wednesday until the 20-year auction at mid-day. Then markets turned lower and the media outlets

decided to pounce. If you were on your phone on Wednesday, you might have seen an alert come across your device attempting to spark fear. This particular headline stated that the Dow was logging its worst day in a month. Question - who has a retirement or other investing goal that lasts just one month?! Perhaps you are about to place a down payment on a home or some other important purchase. Well, you certainly shouldn't be invested in the Dow Jones Industrial Average (i.e., equities) if that were the case. So, how relevant is such a headline? In most cases it isn't. The alert is designed to get you to click on the link, taking you to a website, to either convince you to subscribe to the article or look at some advertisement.

When investors rely on the short-term to determine their investment strategy, they typically get themselves into trouble. When investors focus on the long-term, not only do the worst case scenarios become less relevant, but median returns become more consistent. In the graphic, the rolling returns on the S&P 500 Index since 1871 show that focusing on 10-year results instead of 1-year results drops the worst return from -67.8% to only -5.4%. At the same time, the median return difference between the 1-year rolling returns and the 10-year rolling returns only falls from +10.7% to +8.6%. In other words, investors should ignore the noise and focus on the bigger picture.

Expectations vs Reality.  Back in the 1980s, as well as today, the world of television was a remarkable way to escape the troubles of everyday life if just for a

spell. For example, consumers expect inflation to rise by almost 2x over the next 12 months. CPI is currently 2.3% and the 12-month expectation according to the University of Michigan survey is +7.3%. In 1980, when inflation was near the peak, expectations were for inflation to fall from 14.2% to 10.4%. Indeed, inflation was lower 12 months later, but it only fell to 11.4%. The Cleveland Federal Reserve is tracking May inflation to come in around +0.1%. If inflation is going to double, it's going to have to rise in a hurry to get to current expectations.

In the same University of Michigan survey, consumers have become very bearish. Consumer Sentiment has dropped over the past 12 months from approximately 80 to 55. And yet, there is a disconnect between that sentiment and actual behavior. Retail Sales have increased over the past 12 months. So consumers are not putting their money where their mouth, or sentiment, is. For now, consumer surveys could be a bit unreliable until emotions begin to more closely resemble the data. While escaping into the world of TV is fun now and then, when it comes to investing, data and facts are crucial.

P.S. - After completing this week's musings, the White House decided to throw a curve ball to the markets. Around 8 pm last night, President Trump threatened new tariffs on Europe (EU) as a result of negotiations being "difficult." While the new threat is certainly noteworthy, neither the market nor investors have become accustomed to the way this administration negotiates. It's important to remember that the U.S. makes up a large portion of global consumption (see our early April post). At some point, negotiations will get finalized, but don't count on volatility disappearing. It's the cost of investing.

The classic, "What Does A Yellow Light Mean" scene...

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The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

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