With Michael K. Farr, CEO and Founder of Farr, Miller & Washington
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It’s been an unusual year in the market: The S&P had been down 12% at one point; Brexit created a case of global economic jitters—then the market rallied and hasn’t stopped since. So what’s going on and where do we go from here?
Michael Farr, a CNBC contributor and President of the DC investment firm, Farr, Miller & Washington, and a frequent guest on On The Money, offers a thoughtful and interesting analysis to help us make sense of recent events shaking up the stock market as well as our collective sense of economic security.
Michael believes that rapidly occurring global and national news-making events cause what he refers to as distraction amnesia, where we barely are able to process one crisis before another headline comes along at whiplash speed grabbing our attention and switching our focus. So we’re skipping around from one panic mode to the next: it’s Brexit, then it’s rising or falling oil prices, then terrorism or some other factor beyond our control. Before you know it, we’re investing from an emotional position which, Michael says, is the fall of the long-term investor.
Brexit created an atmosphere of fear driving some investors to panic and sell, which turned out to be a big mistake when the market quickly rebounded from a slight downturn. Now our attention is focused on the presidential election campaign and, once again, emotion is steering the ship, but this time, it’s not fear so much as anger that’s at the emotional core. Michael points out the extreme polarizing sense within this current election debate—no matter if you’re a Trump or a Clinton supporter—emanating mostly from the “economic disparity we’re seeing among socioeconomic groups”, from “a middle-class that hasn’t seen any real wage gains adjusted for inflation since 1997. There’s a large part of the population that is feeling disenfranchised, in many ways voiceless, unrecognized,” says Michael, “and they see the election and other areas as ways to lash out and try to be heard, but they’re shouting.”
As unsettling as this political clamor or any other screaming headline might be, it’s crucial to leave emotions out of the voting booth and your investment choices. Market fluctuations will continue to occur, but the Federal Reserve continues to feed liquidity in the marketplace and to keep interest rates low. Will we see those rise in the near future? No one knows for sure, but Michael quotes one Governor as saying he would need to see evidence of more inflation before he would support a rate hike this year.
Avoiding the inevitable distractions in our present world takes resolve and emotional strength. Michael Farr’s advice is to listen to the words of Steve Pomeranz: “Nobody can really figure out the mechanism behind or against rising markets and especially regarding what’s going to happen in the near future. You’ve just got to focus on what you own. Sometimes that stuff’s going to be overvalued, sometimes it’s going to be undervalued, but underlying these securities is wealth creation for shareholders.”
So, concludes Michael Farr, buy good stuff and hang on to it.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: I’m very happy to welcome back Michael Farr. Michael’s an award-winning author, CNBC contributor, and president of the DC investment firm, Farr, Miller & Washington. We’ve discussed many issues on this show, and I wanted to ask him to come by and see what’s on his mind because we’ve had kind of a wacky year. Welcome to the show, Michael. Welcome back.
Michael Farr: Thank you, Steve. It’s always good to be back with you on On The Money.
Steve Pomeranz: Hey, you know, I was just thinking, this year has been so strange. We’re used to volatility, that’s part of the work that we … that’s the world that you and I live in as we try and help our clients. This year, the market … The S&P was down 12% at one time, in, I guess, February or so. Then we had this big upset with Brexit and the actual whole country is breaking away from the European Union. Then the market rallies and it almost hasn’t stopped since then. What’s your take on this year?
Michael Farr: Steve, it has been a weird year. I think investors and perhaps Americans, in general, are suffering from kind of distraction amnesia. I mean, we keep having distraction after distraction, new earth shattering headline after headline, that we forget where we were six months ago. When you think about January, and the way the markets were cratering, and stock prices were falling, and this was the middle of the beginning of the big correction, and we went down over 10%, and the Fed was going to have at least 4 rate hikes this year, and then all of a sudden, we’ve forgotten all of that. People were absolutely very, very, concerned. We got into, of course, Brexit.
Oil prices have been all over the board. We’ve seen oil prices down at $25, $26, a barrel this year. We’ve got them up over $50; we whipsaw back down into the $40s; now it looks like we’re creeping back up to $50. Within a year, we’ve seen either oil prices falling half or double, depending on whether you’re going to start at the top or whether you start at the bottom.
Somehow, investors seem to process step-by-step and focus on the concerns of Brexit with almost a triage approach. Wait a minute, Brexit, what do I have to do to get through the next 10 minutes, and then 10 days, and which patients have to get into a stretcher first? The if nothing really too severely is wrong, I’m on to the next thing. We forget where we’ve been, and yet for all of the upset, and all of the turmoil, I think it’s still been a central bank driven market. As long as the Feds at the table, share prices have continued to go up. Multiples have continued to expand, and I think risk has continued to creep in despite a whole lot of fear and a market that’s generally hated.
Steve Pomeranz: Well, good explanation. You know, you use this triage example, and the first thing that came to mind is that while you’re performing triage and figuring out which patient gets treatment first, on the loudspeaker, there’s all this noise coming from the election. Forgot to mention that—talk about distraction. This election has been a huge distraction. Every five seconds one candidate is saying something or another, and I just wonder whether this year … People are so negative because the rhetoric is so negative. Here’s the real question I want to ask you. Before Brexit, the market went down. I’m not only talking about the US market, but world markets. That money’s got to go somewhere. There’s this old saying, “Buy the rumor, sell the news.” Once the announcement came out, yeah, there were a couple of days when it continued to go down, but that money went to treasuries of flight to quality, you know that well. I was wondering if you thought it also went into blue chip, dividend paying, US common stock?
Michael Farr: We saw, certainly, a kind of a rotation from the first half into the second half, and a shift in the third quarter from the dividend and income stocks that really performed so fabulously well. In the first six months of the year, there was a shift out of those stocks. They underperformed coming into the third quarter so far, and the blue chips are looking better in July and August, and now into September. Yeah, I think there has been a shift to balance sheets, and there has been a shift to safety, but overall we’ve still seen broad risk increase as dollars feel complacent in a lot of ways.
You said something about Brexit, and I think that Brexit is tied to the anger that we’re seeing in the elections. I think that the key there is anger. We’re making angry votes. Brexit struck me as a totally, irrationally logical, angry vote on behalf of Britains. In many ways, I felt that the polarizing sense of this current election debate—and I don’t care whether you are a devout Trump supporter or devout Clinton supporter that doesn’t matter—but the ire with which people express their political sentiments feels new. I don’t remember feeling this before. Passion, yes. Ire, no.
Steve Pomeranz: Well, it goes without saying that this is the kind of election I don’t think I’ve ever experienced in my many years. Getting back to what’s driving this market, interest rates are very important. You say you believe as long as the Fed is still feeding liquidity into this marketplace and so on. A few weeks ago we heard a Fed governor basically say, a voting governor say, he thought there was definitely going to be interest rate hikes this year. I think in the past, or recently in the past, you said you didn’t think there would be any. Has that changed your thinking at all?
Michael Farr: No. We heard a few weeks ago, actually in the same day, we had one Fed governor come out and thought that we certainly would see interest rate hikes this year, and then Governor Tarullo came out and said, “I need to see evidence of more inflation before I would support a rate hike this year.” Markets dipped and rallied within a couple of hours. This is a couple of weeks ago, but it has been absolutely, I think, characteristic of the way markets have responded to every utterance from the Fed.
To the earlier part of our discussion, as to why we’re getting all of this, why we had Brexit, and why we have the anger in our election, I think that the economic disparity that we’re seeing among socioeconomic groups is pretty important, and that the middle-class haven’t seen any real wage gains adjusted for inflation since 1997 is really at the … I think, the economy is typically at the root of all feel good or not feel good, the anger or happiness. I think there’s a large part of the population that are feeling disenfranchised, in many ways voiceless, unrecognized, and they see the election and other areas as ways to lash out and try to be heard, but they’re shouting.
Steve Pomeranz: I just hope that, unlike Brexit, we end up with a rational result, not some kind of irrational outcome that’s based purely on emotion. There’s a lot of other issues, a lot of issues, that are very, very, important to the future of the United States. I don’t think operating or voting or deciding any issue in anger is healthy for anyone.
Michael Farr: I completely agree. I completely agree, and the other thing that I’ve always told investors for years is that emotion is the fall of the long-term investor. I was meeting with an 80-year-old client earlier today who said he was really fearful and wanted to sell everything he ever had in the markets, and he didn’t care about capital gains. I said, “You know, when I think back over my 30-year career, and my 20 years in running my own company at Farr, Miller & Washington, I can think about those decisions that I made when I was fearful and felt like I had to do something, but I can’t look back at one of them and say, ‘Gosh, I’m really glad I did that. Gosh, that was a really great move.’” Really, avoid the emotion, I think, in the election booth, but absolutely in your investment portfolio.
Steve Pomeranz: I think one final idea about Brexit is that it makes me realize, once again, that nobody really can predict anything about the future. Everybody thought Brexit would be terrible. People wanted to sell. There was clamoring, and then a lot of the large institutions did, in fact, sell, but they were entirely wrong. Nobody can really figure out, really, what the mechanism is behind against rising markets and especially with regards to what’s going to happen in the near-term future. You’ve just got to focus on what you own. Sometimes that stuff’s going to be overvalued, sometimes it’s going to be undervalued, but underlying these securities are creating wealth for shareholders. Final words, Michael?
Michael Farr: Everyone in the audience should listen to what Steve Pomeranz just said. They are among the wisest words I’ve ever heard spoken by any investor or investment counselor. That’s the key, Steve, on the long-term. Pretty much so far, every prediction for the end of the world has fallen a bit short. The current ones probably will too, and you’re going to want to know that you own good stuff. Listen to Pomeranz, buy good stuff, and hang on to it.
Steve Pomeranz: Listen to Farr from Farr, Miller & Washington. Michael, thanks again. Thanks for joining us.
Michael Farr: Great being with you. Thank you.