UPDATE ON THE
ECONOMY AND INVESTMENT MARKETS
Welcome to the Stearns Financial Poolside Chat.
The economic news remains positive, but a few storm clouds continue to linger, making us more
cautious about both the economy and investment markets. The “Echo Bull Market (with no
recession)” highlighted in our last investment podcast has stayed intact.
There are few big bargains around these days in the investment markets. Valuations remain at
average or above average levels for almost every growth asset class (especially stocks and real
estate) except for some international markets, where below average valuations are there for a
reason – Europe and Asia have a number of challenging issues they need to resolve including
the upcoming “Brexit” (Potential British exit from the Eurozone) vote.
Paradoxically, stocks and income producing real estate are forecast to have good “after inflation”
returns compared to bonds and cash, despite a higher probability that stocks and real estate will
have lower than historical returns in the near future.
The good news is that SFG and our preferred management partners in various growth and
“shock absorber” assets continue to find occasional bargains that may enhance absolute and
real, after inflation returns over the next three to five years.
Key Points to Consider
 The Institute for Supply Management (ISM) Purchasing Managers Index had its
third consecutive month of expansion in May. The New Orders Index remains in
growth territory. Both of these components indicate that U.S. manufacturing is likely to
continue to grow modestly. As noted in the last Chat, U.S. manufacturing output is near
an all-time high as a result of advancing productivity. Considering the smaller part of the
economy it represents, this is one of the underappreciated benefits of converging super
trends.
 The Institute for Supply Management Survey for Business Activity in the service
sector (a much larger impact on the U.S. economy than manufacturing) declined
to 55.1% in May. This is still in growth territory. The New Orders Index also declined,
but it also remains at good levels of growth.
 The Conference Board’s Leading Economic Index recent readings had nine out of
ten components move the Index to a new all-time high. This suggests the U.S.
economy still has enough wind in its sails to avoid a recession in 2016.
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Frequently Asked Question
Q: You’ve been saying that the U.S. and global economy are sailing in uncharted
waters, but that the scenario odds favor a positive future. What are the pros and
cons you and your research network see?
A: We are definitely living in an elevated VUCA world, which stands for Volatility, Uncertainty,
Complexity and Ambiguity. We sometimes call this the VUCA virus (not to be confused
with the VIKA mosquito-born virus) because it often spreads anxiety as a result of hyperbole
from the 24/7 media and politicians as well as internet scoundrels trying to sell their own
version of “end of the world snake oil.”
There is a long list of positives and negatives in the VUCA charged world – here area a few
key ones:
VUCA Positives:
 Complex globalization trends are creating a wide array of new products for
consumers with better cost versus quality characteristics. Many new products are in
the pipeline and on drawing boards that will have better user-friendly features, often
with little or no increased cost to consumers.
 Many companies we are invested in are finding ways to make VUCA trends work for
them instead of against them. VUCA investing strategies require more in-depth
strategic and tactical research than ever before, a deeper understanding of the trends
that are forever changing the landscape and an open, agile mind to adjust along the
way.
 For those that are tuned into this new world, VUCA planning strategies will
challenge even experienced financial planners. The good news is we have better
options available in many areas of planning than ever before to:
a) evaluate options and risk, and
b) execute a smart game plan that can pivot and adjust as needed.
 A variety of industries will be revolutionized in the next 10 years, most
especially healthcare. We recently met with several world-class global strategists /
futurists / entrepreneurs who shared examples of the work they are doing. Again it is
very promising for consumers and the U.S. appears to be better positioned than any
other country to benefit from these trends.
VUCA Negatives:
 Complex globalization trends continue to create a shrinking middle class in
the U.S. Workers who can’t or don’t want to re-tool their skills will not keep up and
become increasingly angry about the cards they have been dealt. Note this problem is
also surfacing in many countries overseas as workers try to maintain the status quo in
a world changing faster than they (or their bosses) can comprehend.
 Many countries are trying to deal with converging technology and
globalization super trends by erecting walls and protecting local industries.
This will backfire just as those efforts created misery in previous industrial revolutions
that were less robust than the one we are experiencing.
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 The VUCA paradox of the positive revolution going on in many industries are the
negative implications for “horse and buggy” industries that will be
marginalized or cease to exist in the next 10-20 years. How will employees in
those industries fare? Not well unless they prepare in advance (see SFG’s 2014
Changing Future of Jobs Financial Trends newsletter for ideas in this area).
 Local, state and federal governments, school systems, universities and a
variety of other entities will have difficulty turning their aircraft carriers to
adapt to this changing VUCA world. SFG has many network friends and clients
working in these areas – stress levels are high and event the ones making progress
are dealing with criticism from internal and external stakeholders who don’t fully
appreciate the need for revolutionary thinking and action.
VUCA Virus Prevention:
1. Build your resistance to VUCA by better understanding VUCA trends (our upcoming
SFG Financial Trends newsletter may help), your financial position and planning
options.
2. A healthy lifestyle, including regular exercise, event walking just 20 minutes three
times every week, can help relieve VUCA anxiety symptoms.
3. Avoid VUCA virus carriers – spend your time around positive people who have a good
attitude and stable mental health.
4. Unplug from VUCA virus transmitter as needed, including politicians, TV, newspapers,
radio and internet conspiracy theorists.
5. A grateful attitude for what you have, versus fretting about what you don’t have, has
always been a key to sustained happiness. More than ever, it is a key ingredient in
reducing VUCA-related stress disorders.
Summary
We remain somewhat cautious and continue to examine many traditional valuation metrics,
along with major trend forces that will determine the next phase of the economy and investment
markets. Patience, discipline and diversification remain the best prescription for the current
mixed bag of uncertainty.
~ Dennis, Glenn, Jim, John and PJ (the SFG Investment Committee)
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