If your portfolio is rising, your home value rising, your bank account and wages increasing, and the cost of gasoline doesn’t faze you, then you are in the minority regarding facts versus hyperbole.
The data contradicts all of those positive statements above. The question, however, is not about recession, but rather rate of acceleration. The last time year-over-year data on those issues, and more, showed positive acceleration was 1998. Before drawing any conclusions that my work is projecting a downturn, suffice it to say that I, and other economists, would certainly acknowledge a deceleration in the rate of economic growth, and it starts with earnings.
It’s not just the credit crunch.
The credit mess is certainly a disaster whose reverberations are far-reaching. But the crunch is simply the antecedent to events which preceded it. The availability of cash, at low interest, spurned the latter stages of excess within an economy that was fragile, at best, due to rising core costs of commodities, foodstuffs, etc., causing a slowdown in rate of acceleration for earnings, savings, and capital expenditures.
The shocking part of all this is that the divide between data and hype keeps widening, propelled by ignorance or greed. Those who ignore the chasm fall right into it and wonder why they’re so “unlucky” to have default fall upon them, or portfolios that fluctuate wildly from 13% up to 4% down.
To make matters worse, the Fed’s response to the data was to loosen credit to ameliorate the short-term pain. Ignoring the underlying statistics, they may have created more insidious consequences down the road.
Where from here?
To ignore the fundamentals of prudent portfolio management theory is to bring on more disaster. We cut our equity allocation during this summer’s swoon and benefited from the effect. We, too, felt the pain, but to a lesser degree and with considerably less volatility, overall. These days, we see the potential to rebalance our exposure in equities upwards indicating that the playing field is leveling off and perhaps broadening, particularly in global (non-U.S.) companies.
To those who say I am bearish, I would say they are “half-right”. Without equivocating the objective analysis of my research, I would hasten to add that I am “usually” bullish and looking to own equities rather than to sell. The gradient is executed when there are tectonic shifts in acceleration from sector to sector, stock to stock, asset class to asset class. Today, those shifts are occurring and have my attention. Fundamental characteristics of equity analysis are being thrown out the window by many, in favor of hyperbole, greed, and cheap money.
What I expect to occur in the next few quarters is a continuation in the landscape shifts. Equity weakness is not economic weakness. Whereas the profit in stocks might affect Gross Domestic Product, the mood remains upbeat. People want to own good companies, and real estate, and currency, and art. What will change, however, is the cyclic phasing of certain sectors versus others. Basic Materials might outperform Financials for a spell, and that’s alright. Recognizing these allocation shifts is not bearishness, its practical.
The workings of the market are complex. Sifting down to the essence of profitability, not speculation, is the hard part that many are ignoring today in their rush to judgment when characterizing the tone of the market. Widen the aperture, and more light gets shed on the process.
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