Humans love stories. In ancient times, the only way to share knowledge was through story-telling, person to person and generation to generation. Stories help us visualise, understand concepts and build an emotional connection.
Investors particularly like investment stories. A tidy narrative can help us feel comfortable, and make something otherwise random seem logical and rational.
There are stock stories, like "the new CEO is going to turn the company around" or "the company is about to win a big contract" or "the business is ripe for a takeover".
Then there are market stories: "stocks are overvalued and ready for a correction" or "the Federal Reserve is going to end quantitative easing" or "the market has broken through 20,000 on its way to 21,000".
Once upon a time there was a Trump rally…
This has been the story of 2017 so far. It's been quite an exciting story, with enough emotional drama to keep a large audience interested. And it has been handy in explaining why stocks that were supposedly poised to fall this year have instead gone from strength to strength.
However, the problem with this narrative is that it doesn't really bear scrutiny. It belongs firmly in the fiction section.
The basic storyline is that the election of President Donald Trump will result in sweeping changes in trade, tax, infrastructure and spending that will benefit the US economy enormously. The US stock market has rallied with every page turn.
The kink in this storyline is that it doesn't explain why France, Germany, Japan and other developed markets have also rallied since the presidential election in November. Trump's policies shouldn't drive the French or Japanese share markets higher, especially given that he is threatening a global trade war.
Then there's the inconvenient fact that despite Trump's struggles to put any of his significant promises into effect, markets have rallied anyway.
The story also falters when you consider that most global equity markets had been rallying in the months leading up to the November election, so calling it a Trump rally is a bit of a stretch.
But really, what's wrong with fabricating a story if it makes you feel good?
Well if enough people opt for comfort over reality, they won't be prepared when the storyline eventually turns. If it is not a Trump rally but rather crowd momentum, animal spirits or blind faith with no fundamental basis, then someone will be left with the wrong investments when such behaviour stops.
Emotional stories can get in the way of intelligent investing. We've all seen strategists and economists get their forecasts wrong, only to offer a series of excuses for why. We've seen investors rationalising why they were right and the market was wrong. We've seen people prefer to put good money after bad, rather than admit they got it wrong.
The narrative that we've been following on your behalf is that politics are not the driving force behind markets or economies anymore.
It is quite possible that US politics will be dysfunctional and irrelevant for the next few years, and that Trump's utterings neither hinder nor help business and consumer sentiment. Instead, the US economy will recover on its own at its own pace, and the Federal Reserve will do everything it can to support that economic recovery. Other economies will stage their own recoveries, and many ships will be lifted by the rising tide. But not all ships will rise, and not all tides will either.
Rather than invest where we think Trump's policies will impact the most, we will continue to invest where quality, and the opportunity for consistent growth, exists. In following our own narrative we may end up zigging when markets are zagging, but at least we'll be focused on the reality rather than the imagined. And if we get it wrong occasionally, at least we'll have ourselves to blame rather than a character from a believable but ultimately fictitious yarn.
That way our portfolios can live happily ever after!
For more story-telling — of the non-fiction but entertaining variety — please do register for the upcoming Fisher Funds 2017 client roadshow. We look forward to seeing you.