5 Huge Misunderstandings About The Current Investing Environment

Over the weekend, the Denver Broncos beat the New England Patriots in the AFC Championship. Popular football analysts had – across the board, it seemed – believed the Patriots were a “shoe-in.” They were wrong. Peyton Manning could still throw deep passes to score touchdowns. And Denver’s defense rattled Tom Brady on nearly every Patriot possession.

In a similar vein, an overwhelming majority of analysts believed that the ending of QE3 in December of 2014 and the 0.25% rate hike in December of 2015 would not adversely affect risk assets. They were wrong. Fed monetary policy involves so much more than short-term overnight lending rates; policy affects corporate bonds, foreign bonds, exchange rates and risk preferences. Indeed, since the end of 2014, the dollar has rocketed 20%, the S&P 500 has lost roughly 7% and junk bond yields are the highest that they’ve been since 2009.

In truth, many analysts and many investors have held onto a variety of misunderstandings about the current investing environment. Here are five of them:

1. Lower Oil Prices Are Great For The Economy. Scores of analysts have steadfastly maintained that lower oil prices are a net benefit for the economy. They consistently talk up how consumers are free to spend more because they have more money in their pockets.

However, the analysis misses the mark on several fronts. If you saved $50 at the Shell station last month, you may have decided to spend all of those dollars at Bed, Bath and Beyond. Yet you did not spend additional dollars to benefit the overall economy; rather, you spent the same amount, but you spent it on pillowcases instead of gasoline. In the same vein, even if you spend all of the $50 from your gas pump savings, producers would likely cut back on their spending by a similar amount. In other words, the consumer who has $50 more per month to spend would be offset by the producer who has $50 per month less to spend. That’s a net wash.