Finance people spend a lot of time worrying.....

Finance people spend a lot of time worrying.....

May 09, 2024

I find myself dedicating substantial time to fretting over various concerns almost daily....

  • the looming prospect of a recession
  • the ominous shadow of a bear market
  • the unpredictable emergence of Black Swan events
  • fluctuations in interest rates and inflation valuations
  • the actions of the Federal Reserve
  • and essentially everything else under the financial sun.

This preoccupation with risk management is understandable; after all, negative outcomes tend to inflict greater pain than positive ones bring pleasure, so it's natural for caution to dominate decision-making.

However, there are certain risks that others seem to worry about excessively, whereas I maintain a more tempered perspective.

Take, for instance, the issue of stock market concentration.

A recent analysis from Goldman Sachs highlighted the unprecedented concentration within the U.S. stock market, with the top 10 stocks comprising over a third of the S&P 500. 1

Yet, to me, this observation prompts a simple question: So what?

If anything, it merely highlights the performance of some of the larger, more robust companies.

Is that inherently problematic?

Furthermore, comparisons reveal that stock markets worldwide exhibit even higher levels of concentration than their U.S. counterpart. 2

Consider the recent surge in emerging markets, where a single stock—Taiwan Semiconductor—was responsible for a staggering 70% of the index's movement. 3

This concentration is not a novel phenomenon and is unlikely to dissipate anytime soon. Over the long term, stock market returns have consistently been driven by a select minority of top-performing companies. 2

Granted, the dominance of large-cap growth stocks may wane eventually; no strategy is foolproof indefinitely. However, for those overly concerned about market concentration, diversification across various asset classes or investment strategies can present a viable solution.

Similarly, the alarm bells ringing regarding government debt levels warrant scrutiny. 

Bloomberg's latest report underscores the precarious trajectory of U.S. government debt, with simulations indicating an unsustainable path in the majority of scenarios. 2

While acknowledging the necessity for eventual action, I remain skeptical until tangible evidence of a crisis manifests.

I believe the persistent warnings about government debt have yet to materialize into the catastrophic scenarios prophesied by doomsayers. Although the pandemic undoubtedly escalated debt levels, it's essential to maintain perspective.

While the escalating interest expense relative to the economy raises valid concerns, it’s my belief that current levels still fall below those witnessed in previous decades. Moreover, the correlation between economic growth and government debt implies that as the economy expands, so too will the debt.

In assessing the situation, I feel it's crucial to recognize the inherent advantages that underpin the U.S. economy.

With the world's reserve currency, the largest and most liquid financial markets, and a thriving corporate landscape, the U.S. possesses formidable strengths.

Debt-to-GDP is now as high as it was immediately following World War II. That seems scary until you realize in Japan, debt-to-GDP is closer to 300%. I’m not saying we should test our limits but there is no pre-set line in the sand on these things.

Additionally, I infer to view government debt not solely as a liability but also as an asset for various stakeholders.

I deduce that in the event of a crisis, the Federal Reserve and Treasury possess the capacity for innovative intervention.

As Winston Churchill famously remarked, "Americans tend to pursue the right course of action after exploring all alternatives".

Similarly, my approach to government debt aligns with this sentiment. While acknowledging the importance of prudent fiscal management, I refuse to succumb to unwarranted panic.

Instead, I focus on aspects within my control, leaving market concerns to those who choose to dwell on them.

In the words of investment luminary Bill Miller, "my worries about the market typically amount to "nothing," given the prevailing atmosphere of perpetual apprehension. Rather than allowing myself to be consumed by futile concerns, I prioritize making sound, long-term investment decisions."

I’m not one of those "nothing matters" type of guys. Sometimes, there are legitimate risks to the financial markets. The problem is that most of the time, you can’t or won’t see the true risks coming.

I prefer to worry about the stuff I can control.

1.IS the S&P 500 too concentrated? March 21, 2024 https://www.goldmansachs.com/intelligence/pages/is-the-sp-too-concentrated.html

2. The Interlocking dimensions of stock market concentration. March 11. 2024 https://www.ft.com/content/ba598c19-df9d-46fe-a483-8f9ab7fed11a

3. The Global Economic Disruptions from a Taiwan conflict. December 14, 2022 https://rhg.com/research/taiwan-economic-disruptions/

4. A Million Simulations, One verdict for US Economy. Debt Danger Ahead. April 1, 2024 https://www.bloomberg.com/news/articles/2024-04-01/us-government-debt-risk-a-million-simulations-show-danger-ahead?embedded-checkout=true

5. Why is the U.S. Fiscal outlook more daunting now than after World War II. August 29,2023 https://www.pgpf.org/blog/2023/09/why-is-the-us-fiscal-outlook-more-daunting-now-than-after-world-war-ii