The first quarter just seemed to zoom by this year, bringing continued optimism (or, animal spirits if you prefer) to the stock market and leaving even higher valuations in its wake. The Standard & Poor’s 500 Index returned an impressive 6.07% for the quarter, on the tail of the previous five consecutive quarters of positive performance. The second quarter is now a third of the way through and, we are still comfortably in the black with April up a bit over 1%.
As a friend in the industry paraphrased recently, the markets may climb a wall of worry but they typically do not respond well to uncertainty. Most will agree that is usually the case; however, the stock markets have been thriving for a while now, right alongside plenty of uncertainty. The rally has continued in the face of significant political changes in administrations and policies, both here and abroad. It’s held on in spite of intensifying geopolitical tensions in several parts of the world and a rise in populism and protectionism that have the potential to increase those tensions. In the U.S., we are also dealing with healthcare coverage revisions that may or may not happen and will, or will not be an improvement. Logically, we can be fairly certain that whatever the modifications, they will not benefit all corporate entities (i.e.

“I don’t understand you,’ said Alice. ‘It’s dreadfully confusing!’
‘That’s the effect of living backwards,’ the Queen said kindly: ‘it always makes one a little giddy at first–‘
‘Living backwards!’ Alice repeated in great astonishment. ‘I never heard of such a thing!’
‘–but there’s one great advantage in it, that one’s memory works both ways.’
‘I’m sure mine only works one way,’ Alice remarked. ‘I can’t remember things before they happen.’
‘It’s a poor sort of memory that only works backwards,’ the Queen remarked.”
                                               Lewis Carroll, Through the Looking-Glass, and What Alice Found There
The seemingly nonsensical conversation between Alice and the White Queen in Lewis Carrol’s sequel to Alice in Wonderland, just might be the perfect description of Finance and Economics. Unfortunately, we live and make investments in a world using the “poor sort of memory”. We don’t “live backwards” like the Queen, although market pundits sometimes make predictions as if they did.
Whether it be the economy, the financial markets or the future value of a particular security, economists, analysts and portfolio managers use memories that only work “one way” as their starting point. Historical information forms the basis of the underlying assumptions used in modeling and forecasting.