If we could make a broad statement about stock investors, it would be that they have to be generally optimistic about the future. If stock investors didn’t feel that the future would be better than the past, then stock investments are most likely not for them. All things equal, companies have to do better than they have been doing in order for stock prices to go up.
In an interesting storyline last year, Bloomberg published an article called “A Pessimist’s Guide to the World in 2016.” In the article, they highlight a number of the less popular, but potentially problematic storylines for the coming year. It wasn’t necessarily investment advice, but their pessimistic storylines had many investment implications. Believe it or not, the 2016 edition that was published on December 15, 2015, called two of 2016’s surprising developments: the Brexit vote and the election of Donald Trump.
While these were positioned as pessimistic outcomes, they didn’t necessarily wreak havoc on the market or our daily lives like they were thought to potentially do. In the case of the Brexit (the term to describe the United Kingdom’s referendum to leave the European Union), stock markets did decline, but they recovered fairly quickly from the losses. With the election of Donald Trump as President, stock markets actually rallied on the hopes that lower corporate taxes, infrastructure spending and less regulation would be good for the economy and stocks.
Emboldened by their calls for 2016, the Bloomberg authors put back on their pessimistic glasses and published “The Pessimist’s Guide to 2017” on December 5, 2016. Looking ahead to 2017, as a pessimist, the authors outlined everything from a nuclear crisis with North Korea, Germany’s Chancellor Angela Merkel (who has been instrumental in keeping the European together over the last few years) fall from power, and social disorder in the U.S. There were additional calls for the internet of things to be used against us, trade wars and spiking oil prices as conflict takes over Saudi Arabia.
As we can see, things can get quickly out of hand with pessimistic glasses on. While the authors are very clear that these are not predictions, we can see how some of these storylines may actually come to fruition.
So, what are investors to do? The honest answer is “not much.” The popular investment axiom, “Markets climb a wall of worry” is very fitting here. Investors are constantly confronted with political and economic challenges. We have them every year and 2017 will be no different. Yet, in the face of many negative storylines, markets have historically gone up more than they went down. This is because capitalism runs on optimism and a get-it-done attitude that forces companies to adapt to any change that comes their way.
Further, having an effectively diversified portfolio is a helpful way to manage many of these potential, pessimistic forces. With an effectively diversified portfolio, we can help mitigate the risk associated with country-, industry- and company-specific events. And, having a mixture of stocks and bonds helps manage the overall volatility that comes from global economic cycles and events. Diversification is a powerful tool if use appropriately. And, it works for both pessimists and optimists.