“Ya gadda have a praaacess”
– British portfolio managers mimicking their American colleagues
When long ago a former employer sent me to London to join the other Americans, or mostly Americans, building out its U.K. office, my job was to create a process. In institutional asset management, process was the American way. For sales presentations and especially dealing with investment consultants, you needed process charts that showed information flowing this way and that and, ultimately, morphing through its travels on the page into repeatable investment decisions. Those charts proved your legitimacy as an institutional manager. Regardless of whether they described your actual decision making, they let the community know that you weren’t just a “bunch of gunslingers.” And you couldn’t build a business in that community without your process charts.
But British consultants were different. They didn’t care so much about your process as they wanted you to knock them over with flair. They wanted imagination, story-telling, charisma. The process charts in your pitchbook didn’t matter as much as the command in your voice. In London, gunslinging was nothing to be ashamed of, as long as you slung with style.
So it all came down to process versus flair. Along with baseball caps and mismatched accents, the clash of cultures depended on which of the two qualities was deemed most important. And along with the accents, in particular, the contrasting approaches explained mimicry performed by amused Brits when the conference room door was comfortably shut or when the pub was crowded enough that voices didn’t carry. Ya gadda have a praaacess.
So today, I give you what else but a few pieces of process. Not a complete one, not even close, but I’ll share two dashboards that compare current stock market conditions to the conditions that shaped past market cycles. The dashboards can support your portfolio decisions, in my opinion, regardless of whether you’re a process Kool-Aid drinking septic or a flair fancying Anglophile. (For the same approach applied to the economy, see “Here’s a Strong Signal from the Economic Dashboard.”)
Pension plan administrators do it. Their actuaries and consultants do it. Professional endowment and foundation investors do it. Financial advisors do it. Private investors may or may not do it, but they probably should.
Even as the Fed’s decision makers are beginning to worry less about recession and more about bubbly stock prices, we’re not yet moved by their attempts to curb the market’s enthusiasm. After all, the fed funds rate sits barely above 1%, which not too long ago qualified as a five-decade low. And other indicators, besides interest rates, aren’t exactly predicting the next bear, either. Inflation is subdued, credit spreads are tight, banks are mostly lending freely and the economy is growing, albeit slowly. It just doesn’t feel as though we’re close to a major market peak.
It seems every bank, including central banks, publishes a financial conditions index these days. And because financial conditions typically lead the economy, it makes sense to track them. In fact, they might contain even more information than they get credit for. They might offer the elusive “crystal ball” that foretells our economic fortunes.
Sound far-fetched? Spend a few minutes with this week’s pictures and talk, and you’ll be well equipped to judge for yourself. We start with seven of our favorite indicators, shown in the table below: