Last week’s Market Outlook referenced the volatile psychological relationship the markets have with the price of oil. Almost prophetically, the volatile changes in the weather this past week triggered a knee-jerk response in the price of heating oil, gasoline, and coal. Despite any discernable difference in the fundamentals of the commodity from one week to the next, the market displayed greed, fear, paranoia and lust caused by the simple change in the thermometer.
That is not how a statistician or purist thinks about long term market phenomena.
“Price creep” is not new.
The case can be made that as far back as 1998, nearly a decade ago, the price of oil began its creep upwards, and was not benchmarked against any temperature or climatalogical subtleties.
No indeed, back then interest rates stopped their incessant disinflationary decline, and inflation began to germinate throughout the economy.
Today, the top performing equities are Energy stocks and companies related to tangible assets, pricing power and patterns of earnings acceleration. Hardly the characteristic of a one week stampede led by profiteers and fear mongers.
Greed deflects attention from fundamentals.
By pandering to the greed and fear in the market, speculators succumb to all the stereotypes that Main Street uses to describe the financial markets. Imagine if the ego of every dot.com trader had supplanted the methodology and patience of his more experienced brethren? What if investors measured the success of their investment journey only between the hours of 9:30 a.m. until 4 p.m.? What if, as my junior contemporaries remind me constantly, “it’s different this time”?
You would wind up with the tech wreck of 2000-2003, and possibly the mania of 2006-2007 that exacerbates risk by speculating in real estate, energy futures, and highly margined equity portfolios.
In the global economy as a whole, trends are inexorable. The mechanism of long-term capital gains operates with or without speculators and egotists. In fact, the collateral short cycle swings only dilute the magnitude of longer cycles and extend the amplitude, or duration, of cycle shifts. The current climate of last gasp aggressiveness poses a threat, not an opportunity, to the perpetuation of longer term themes that will endure and prosper with or without the hyperbole.
How ironic if the market must endure the near-term pain of lessons only recently experienced by the NASDAQ.
Quantitative statistics define the landscape.
By all objective measures, Energy, Basic Materials, and agriculture lead the quantitative discipline of Arlington Econometrics’ research, and respond to a secular imperative of diminishing natural resources, high demand, price pressure, and profit potential. When integrated into a geopolitical construct, those sectors hold leverage over fiscal and monetary policy for nations throughout, and if not responding to political conversation, are perhaps leading it.
Further, consumer confidence needs not be so perilously linked to events of the day if the process and destination become more important than the exogenous “noise”.
The role of the market, indeed the role of government, is to lead by defining a clear-cut mission statement and to focus the psyche of its participants on the long-term goal and reward.
Unfortunately, commissions, fees, and product hype are what drive Wall Street, and investors pay the price for that avarice.
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