Kaleidoscope
Key economic factors, (such as interest rates, leverage, speculation, valuation expansion, e.g.) got terribly out of balance in the last decade, exacerbated by personalities and felons whose charisma helped fuel the calamity. Indeed, the secular boom/bust cycle would have played out with or without their help, but the erosion of “principled investing” accelerated the negative influences that eventually led to a magnitudinal failure in the markets and the economy.
At a time when markets are gyrating, seemingly without purpose or direction, I get the perception that the economic landscape is woven together by parts that don’t necessarily fit together, some which don’t even belong. As politicians, analysts, and investors seek comprehensive solutions to far-reaching problems, does it not seem that the dynamics are unsynchronized? Policy goals and monetary efforts aside, the bigger issue is the notion that we need to feel connected to rational data, and be unwavering in our conviction to invest money for the long term.
In other words, sometimes the solution to economic matters is not economic responses, but rather a feeling of innate comfort and optimism.
In a climate of disequilibrium and lawlessness, the natural instinct is first to withdraw, as the market clearly has done, then to go after the miscreants who caused the systemic breakdown in the first place, (somehow ignoring that our participation in the greed-driven excess might also be blame-worthy).
Markets
Globalization and the synchronicity of interdependent commerce drove the same factors around the world as those which affected the United States. Technology played its role, too. Our dot.com forebears probably could not have foreseen how instantaneous communication might have exacerbated the negative influences of trading, exogenous news, and a constant background “chatter” from business news channels. The multiplier effect of push-button technology exceeded our ability to process the data. Leverage built into our financial system was simply an annotation within computer programs, not necessarily a well thought out plan for long-term investing.
The post script to our actions/reactions is now being written in the second leg of the parabolic secular trend, and in legislation/policy designed to ameliorate the impact of bad news, as well as to redirect the focus from the short-term pain to the longer-term opportunity before us.
With yields having fallen to record levels in the past year, and incentivized by monetary policy to remain there, some have questioned why we can’t achieve a sustainable rally in the economy or stocks? An unusual mosaic of housing, portfolio declines, greed, negative psychology, and unemployment are providing sufficient impediment to a turnaround, that favors inertia over speculation or rebound. These data exert an onerous influence upon the markets.
Perhaps we need more punitive monetary policy, such as a rise in interest rates. While the current bias “makes sense” to many, it has become an unwitting culprit in encouraging a depletion in the savings rate. There is no incentive to park long-term money in low-yielding time deposits. Additionally, the traditional alternative investment strategy, in which equities provide an outlet for capital-gains-seeking investors, doesn’t exist either. In times when equities project danger, or lower capital gains probabilities, high yield bonds have usually provided safe-haven alternative. Today, no such alternative parking-place exists, thus the markets stagnate.
Thanks to stimulative global monetary policy of the last decade, we have painted the world economy into a corner.
Capacity, productivity, profitability, and innovation are combining for a kaleidoscopic cacophony of historic proportions. As a result I had grudgingly reduced equity risk exposure in our portfolios to its lowest level in a decade. The probability of secular long term gains might be rising as stocks slide lower, but I didn’t want to be out in front of a bear market tsunami without protection. Indeed, equities appear to be decelerating their downside momentum, making for a potential turnaround by mid-Fall. (This contrasts with the mini-bull short-cycles we have seen during the past year which deviously sucked investors into a no-win game of “guessing where the bottom might be.”) Stocks are undervalued, globally. But their potential can only be fulfilled with a vibrant fixed income marketplace alongside.
Bonds today offer no compelling relative value, other than their appropriate weighting representation within a broader asset allocation plan. The yield curve does not favor long-term investments. The probability that rates might rise, concomitant to a rise in economic activity, is quite high. Despite potential for periodic fluctuations in interest rates and currency values, the capital gains opportunity in the fixed income market died at the end of the last decade.
With stocks crashing through one “bottom” after another, it is tempting to throw up one’s hands and to park money in short-term time deposits. Unfortunately, the price to be paid for permanently waiting on the sidelines is net return. More than in the recent past, the probability of equities outperforming bonds on an annualized basis is growing. Said another way, if you commit to inactivity or cash, a rise in interest rates will hurt you in fixed income more than any other financial security.
Strategy
It was over three years ago when I argued that the bull market in stocks was expanding precipitously and with too much leverage (margin). I further stated that low interest rates were contributing to the disequilibrium by flooding the market with cash and by removing an appropriate investment surrogate for stocks, mainly bonds, from investment consideration. The cycles progressed at such a rapid rate that the confluence of all factors magnified the collision at the top, and drove markets down linearly rather than in an orderly parabolic flow.
Heavily leveraged bets in real estate, equities, employment, production capacity, retail sales, and exports imploded, with the net result being a near-zero growth rate in all of those bets for the last two years. That is not an outcome, or bet, I am comfortable making.
Today we are attempting to breakout through resistance barriers whose markings are traditional indicators and normally cyclical in their behavior. Any manipulation by our legislators upon upwards data might be as volatile as manipulation was downwards. But I do expect a recalibration of indicators associated with turning around our moribund economy, what many have referred to as “hitting the reset button.” Examples of these stimuli might include letting interest rates rise rather than holding them down artificially. If “growth” does occur, raising rates would achieve a more neutral bias in monetary policy. How high to go, and at what velocity, could be problematic, but consistent with a secular trend away from disinflation.
We must not confuse short-term market cycles with secular trends. Bond yields will reverse course and rise to a sustainable level as moderate economic growth returns, and as real rates of return expand. Progress on the fiscal/legislative front has the potential to accelerate growth industries for decades, and to build strategic synergies in energy, infrastructure, education, science, and national defense. Employment should rise as a result. Rather than a deconstruction of our industrial models, we hope for structural improvements.
The deficits are, indeed, a problem. The overhang of long term liabilities can quickly destimulate any progress made. But if the last decade was built upon leverage that caused the problem, perhaps a prudent allocation of public/private capital might start the painstaking progress of reversing the immoral excess and paying back the ills of misplaced consumption?
The irony of these questions is a focus upon short-term responses by Wall Street and Main Street, even as we try to widen the aperture of perspective to longer-term solutions. I blame the problems, themselves, on day-to-day greed. Why, then, do we magnify the problem by looking at solutions through the same prism?
As the potential grows for capital gains expansion and legislative initiatives, it is critical to set out with a methodological advantage. Schemes and trading strategies quell our short-term instincts for success but do little to solve systemic ills. Indeed, the landscape of investment opportunity is much broader in “value” (depressed) stocks than it is in growth equities. Buy, if you must, for maximum capital gain potential, but I prefer to remain in leading sectors rather than to “bottom fish” amongst the laggards. Those depressed stocks are down there for a reason. If necessary, rather, let’s start with a five year estimate and build our portfolio accordingly.
Feeling “secure” tomorrow will reflect how well the other things have been done first.
Asset Allocation:
Equity 35%/Fixed Income 30%/Cash 35%
Tuesday, March 31, 2009
Friday, March 20, 2009
Market Commentary for the week of March 23, 2009
Who leads?
Many of you have had animated discussions about whether or not the economy leads stocks, or whether stocks lead the economy. I subscribe to the latter, particularly in bear markets, where diminishing equity performance drags upon fundamentals and psychology, and at significant bottom junctures at which speculators ride “value” stocks for short-term capital gains. Furthermore, at whichever point the markets do turn around, equities will lead the way before fundamentals resuscitate and catch up to stock performance.
A modest appetite for buying depressed stocks, while certainly not a preindicator of economic recovery, is necessary to create a stabilization which might, later, result in a price mark-up phase.
My readers know that I have referred to the secular coupling of stocks and economics as a “parallel disconnect,” a phenomenon in which it appears as if the two trendlines are moving in unison. We know, however, that their mere synchronicity is not always a direct correlation. Such might be the case today, as stocks decelerate their decline while the economy continues to falter. Not only is the economy showing signs of fatigue, but we who watch it are, as well.
Real or not, perceptions are more valid, and devious, than fundamentals.
U-shape recovery.
Today’s excessive bear market decline requires a mammoth turnaround in corporate balance sheets in order to restore profitability, the engine of growth, to the equities markets. While we have seen several bull-cycle bounces within the current phase, they are neither sufficient nor powerful enough to reverse the decline. Indeed, since time is a major factor in the expression of quantitative solutions, the longer the decline continues, the longer it will take to climb out of the hole. My estimates indicate a possible reversal can occur no sooner than November of this year.
Global baskets are registering the same level of distress. The factors that precipitated this bear market are universal, and not beholden to any borders or culture. Across the asset classes, all capitalizations, it is hard to find a persistent, counter-cyclical, bull trend.
All is not lost, however. The deeper the decline the more meritorious the upside response. Applying quantitative data to a fundamental overview, I find that the recalibration at the bottom will be expansive and inclusive of all sectors, all regions. In other words today’s pain is so pervasive that the breadth of shares declining will be matched by the breadth of shares participating on the upside.
Hold on.
We are dealing with an overhang of expectations, previous owners looking for a bailout, and negative velocity. Its effects resonate upon the rich and poor, alike. Fear breeds more fear. When banks stop lending, when we stop asking, markets grind to a halt. The economy is not in cardiac arrest, it is in critical condition. It will improve. We await those factors (like value speculators, for example) which might jump-start the upward reversal in stocks, hoping, also, to preindicate a reversal in economic stagnation.
Many of you have had animated discussions about whether or not the economy leads stocks, or whether stocks lead the economy. I subscribe to the latter, particularly in bear markets, where diminishing equity performance drags upon fundamentals and psychology, and at significant bottom junctures at which speculators ride “value” stocks for short-term capital gains. Furthermore, at whichever point the markets do turn around, equities will lead the way before fundamentals resuscitate and catch up to stock performance.
A modest appetite for buying depressed stocks, while certainly not a preindicator of economic recovery, is necessary to create a stabilization which might, later, result in a price mark-up phase.
My readers know that I have referred to the secular coupling of stocks and economics as a “parallel disconnect,” a phenomenon in which it appears as if the two trendlines are moving in unison. We know, however, that their mere synchronicity is not always a direct correlation. Such might be the case today, as stocks decelerate their decline while the economy continues to falter. Not only is the economy showing signs of fatigue, but we who watch it are, as well.
Real or not, perceptions are more valid, and devious, than fundamentals.
U-shape recovery.
Today’s excessive bear market decline requires a mammoth turnaround in corporate balance sheets in order to restore profitability, the engine of growth, to the equities markets. While we have seen several bull-cycle bounces within the current phase, they are neither sufficient nor powerful enough to reverse the decline. Indeed, since time is a major factor in the expression of quantitative solutions, the longer the decline continues, the longer it will take to climb out of the hole. My estimates indicate a possible reversal can occur no sooner than November of this year.
Global baskets are registering the same level of distress. The factors that precipitated this bear market are universal, and not beholden to any borders or culture. Across the asset classes, all capitalizations, it is hard to find a persistent, counter-cyclical, bull trend.
All is not lost, however. The deeper the decline the more meritorious the upside response. Applying quantitative data to a fundamental overview, I find that the recalibration at the bottom will be expansive and inclusive of all sectors, all regions. In other words today’s pain is so pervasive that the breadth of shares declining will be matched by the breadth of shares participating on the upside.
Hold on.
We are dealing with an overhang of expectations, previous owners looking for a bailout, and negative velocity. Its effects resonate upon the rich and poor, alike. Fear breeds more fear. When banks stop lending, when we stop asking, markets grind to a halt. The economy is not in cardiac arrest, it is in critical condition. It will improve. We await those factors (like value speculators, for example) which might jump-start the upward reversal in stocks, hoping, also, to preindicate a reversal in economic stagnation.
Monday, March 16, 2009
Market Commentary for the week of March 16, 2009
Now that Bernie Madoff has been incarcerated, do you feel more safe about investing?
As Citigroup rises 30% in price-per-share (from one dollar), are you ready to declare the “bull market is back?”
As the market bounces off of a thirteen year low, are you ready to commit to its turnaround?
I ask these questions to try and highlight the difference between events-driven investing and macro investing. Without equivocation, we are happy about the current events turnaround. But “happiness” and “current events” are no substitute for fundamentals and a large aperture perspective. Besides, if it’s bounces you like, we’ve already had three of them since last summer, all to no avail.
This time, it’s real.
There is no doubt, however, about the pain and devaluation having been inflicted by the bear market which began in 2007. In that short period of time more than 50% of market capitalization has been eroded. The aggregate gains in the global equities markets during the past decade have evaporated. Pension and private savings have been permanently injured. The question today, in spite of the current events, is “how much more severe can the damage be?”
The destructive nature of this bear, and the economic crisis that parallels, is a peculiar blend of swift inequity along with quantitative rebalancing. It was simply impossible to build perpetual capital gains upon a foundation of exorbitant leverage and unrealistic expectations. Anyone in their thirties has now seen this happen twice in their lifetime, the first being the tech-wreck a decade ago.
We know from historical perspective that the average return in stocks over time exceeds the average return on most other investments. We should know, too, that the type of volatility we are currently experiencing is part of those historical averages. It should come as no surprise that asset allocation is the easiest way to mitigate that volatility while still participating in the potential for historically nominal capital gains.
No one, certainly not I, begrudge the speculators who acknowledge the incumbent risks of equity investing. On the other hand, we have little sympathy for leveraged enthusiasts who play with other people’s expectations, and do so quite poorly.
It’s also an opportunity.
To be fair, as the market and economy decline, there are signs of a potential turnaround. Savings rates are growing, globally, although not yet matched by an appetite for investing. The flip side to every bear is a bull. That is why depressed valuations, and a level playing field, might create the next opportunity for growth. The breadth and magnitude of the global decline recalibrates all financial instruments to an equilibrium we haven’t seen in decades.
But anxiety is stronger than fundamentals. I caution against anointing short cycle upswings as being more powerful than the secular bear phase in which they exist. As earnings momentum dissipates, so too does the fundamental underpinning of momentum-driven capital gains.
“Why didn’t we see this coming,” I am often asked. Because fear and anxiety are not pre-indicators of a market decline, they are lagging indicators. As long as the markets performed, no one complained. Readers of my essays know that I harangued at great length and for several years about the “quantitative unsustainability of equity price increases.” That is why I rebalanced asset allocation two years ago away from risk. But, alas, the fall was all consuming. Bonds, stocks….even money market funds became suspiciously vulnerable.
Although it could take awhile before the economy turns around, it will turn around. The gift of this crisis is that the next generation should not be seduced by the same possibilities. Will we ever learn?
As Citigroup rises 30% in price-per-share (from one dollar), are you ready to declare the “bull market is back?”
As the market bounces off of a thirteen year low, are you ready to commit to its turnaround?
I ask these questions to try and highlight the difference between events-driven investing and macro investing. Without equivocation, we are happy about the current events turnaround. But “happiness” and “current events” are no substitute for fundamentals and a large aperture perspective. Besides, if it’s bounces you like, we’ve already had three of them since last summer, all to no avail.
This time, it’s real.
There is no doubt, however, about the pain and devaluation having been inflicted by the bear market which began in 2007. In that short period of time more than 50% of market capitalization has been eroded. The aggregate gains in the global equities markets during the past decade have evaporated. Pension and private savings have been permanently injured. The question today, in spite of the current events, is “how much more severe can the damage be?”
The destructive nature of this bear, and the economic crisis that parallels, is a peculiar blend of swift inequity along with quantitative rebalancing. It was simply impossible to build perpetual capital gains upon a foundation of exorbitant leverage and unrealistic expectations. Anyone in their thirties has now seen this happen twice in their lifetime, the first being the tech-wreck a decade ago.
We know from historical perspective that the average return in stocks over time exceeds the average return on most other investments. We should know, too, that the type of volatility we are currently experiencing is part of those historical averages. It should come as no surprise that asset allocation is the easiest way to mitigate that volatility while still participating in the potential for historically nominal capital gains.
No one, certainly not I, begrudge the speculators who acknowledge the incumbent risks of equity investing. On the other hand, we have little sympathy for leveraged enthusiasts who play with other people’s expectations, and do so quite poorly.
It’s also an opportunity.
To be fair, as the market and economy decline, there are signs of a potential turnaround. Savings rates are growing, globally, although not yet matched by an appetite for investing. The flip side to every bear is a bull. That is why depressed valuations, and a level playing field, might create the next opportunity for growth. The breadth and magnitude of the global decline recalibrates all financial instruments to an equilibrium we haven’t seen in decades.
But anxiety is stronger than fundamentals. I caution against anointing short cycle upswings as being more powerful than the secular bear phase in which they exist. As earnings momentum dissipates, so too does the fundamental underpinning of momentum-driven capital gains.
“Why didn’t we see this coming,” I am often asked. Because fear and anxiety are not pre-indicators of a market decline, they are lagging indicators. As long as the markets performed, no one complained. Readers of my essays know that I harangued at great length and for several years about the “quantitative unsustainability of equity price increases.” That is why I rebalanced asset allocation two years ago away from risk. But, alas, the fall was all consuming. Bonds, stocks….even money market funds became suspiciously vulnerable.
Although it could take awhile before the economy turns around, it will turn around. The gift of this crisis is that the next generation should not be seduced by the same possibilities. Will we ever learn?
Monday, March 9, 2009
Market Commentary for the week of March 9, 2009
1979. 1996. 1953. 1949.
Investors were punished last week with references to those, and other, years, as the markets sought comparison to, or solace from, the pain they are enduring from portfolio declines, record unemployment, and economic stagnation.
Enough already!!
While it is sometimes helpful to draw comparisons from historical data, the only thing we know about the future is that “we don’t know.”
Even my own quantitative science is derived from the notion that patterns repeat, and that statistical probabilities can be measured. But even in a world of mathematical computation and absolutes, all we can create is a scale of probabilities. Portfolio management, itself, is the art of balancing those probabilities so as to manage risk and to achieve client’s goals and expectations for upside performance.
But historical references place too much emphasis on absolute comparisons, in my judgment, as if we know that these thresholds, will/might provide the same results.
In the meantime, your portfolio, your dreams, are paying the price.
Hold on or jump ship?
If investor skepticism gets any worse, we will be establishing our own historical precedent for inertia, making 2009 one of the worst ever. The public is looking for guidance and hoping that something, someone, can pull this economy back from a recession.
In conversations with clients and colleagues, I am struck by the uneasiness and pessimism which abound. Our collective mood is not upbeat, although we suspect that an end to the misery is near. Perhaps these are the times to search for opportunity?
Stay.
Although any kind of sustained upside rally is elusive, there is enough cash on the sidelines to expect that it might be directed back into investments. We know, anecdotally, that money market and savings rates have modestly begun to increase. That money is presently being held for a “rainy day”, but might also be thought of as potential fuel for a bull trend in equities. Indeed, the will to invest might be temporarily suspended, but most people believe that they would come back if given sufficient incentive. It is foolish to try and “time” the market, which is why I believe in earnings-driven sector allocation.
No one, today, thought they would be living comparisons to previous negative historical inflection points. In fact, at the root of many portfolio ills was the belief that it was “different this time,” and such negative historical comparisons could not “happen again.” But, alas, that notion, itself, became the anchor that immobilized rational thought.
We know the markets will recover. That is both a historical and quantitative reality. Vilify the recent past, if you must, but prepare for an opportunity that is thus far unseen.
Investors were punished last week with references to those, and other, years, as the markets sought comparison to, or solace from, the pain they are enduring from portfolio declines, record unemployment, and economic stagnation.
Enough already!!
While it is sometimes helpful to draw comparisons from historical data, the only thing we know about the future is that “we don’t know.”
Even my own quantitative science is derived from the notion that patterns repeat, and that statistical probabilities can be measured. But even in a world of mathematical computation and absolutes, all we can create is a scale of probabilities. Portfolio management, itself, is the art of balancing those probabilities so as to manage risk and to achieve client’s goals and expectations for upside performance.
But historical references place too much emphasis on absolute comparisons, in my judgment, as if we know that these thresholds, will/might provide the same results.
In the meantime, your portfolio, your dreams, are paying the price.
Hold on or jump ship?
If investor skepticism gets any worse, we will be establishing our own historical precedent for inertia, making 2009 one of the worst ever. The public is looking for guidance and hoping that something, someone, can pull this economy back from a recession.
In conversations with clients and colleagues, I am struck by the uneasiness and pessimism which abound. Our collective mood is not upbeat, although we suspect that an end to the misery is near. Perhaps these are the times to search for opportunity?
Stay.
Although any kind of sustained upside rally is elusive, there is enough cash on the sidelines to expect that it might be directed back into investments. We know, anecdotally, that money market and savings rates have modestly begun to increase. That money is presently being held for a “rainy day”, but might also be thought of as potential fuel for a bull trend in equities. Indeed, the will to invest might be temporarily suspended, but most people believe that they would come back if given sufficient incentive. It is foolish to try and “time” the market, which is why I believe in earnings-driven sector allocation.
No one, today, thought they would be living comparisons to previous negative historical inflection points. In fact, at the root of many portfolio ills was the belief that it was “different this time,” and such negative historical comparisons could not “happen again.” But, alas, that notion, itself, became the anchor that immobilized rational thought.
We know the markets will recover. That is both a historical and quantitative reality. Vilify the recent past, if you must, but prepare for an opportunity that is thus far unseen.
Monday, March 2, 2009
Market Commentary for the week of March 2, 2009
While the cyclical expectations for the market continue to disappoint, the secular downtrend remains intact, confirmed by the actions of last week's trading. Once again, it is important to distinguish between the day-to-day movements of equities versus the longer term parabolic trend. Unfortunately, there is very little to dissuade quantitative analysts from confirming that we are still in a recessive bear trend.
I will, however, leave behind my negative bias to report that I see the opportunity for real return from equities as being at its greatest level in nearly a decade. This comes from my respect for "value investors" who believe that the cheaper the market gets, the better it looks. Combining our two fundamental approaches, and respecting that you don't want to buy stocks "on the way down", we both come to the conclusion that a bottom is imminent, albeit not yet here. Therefore, amidst all the gloom about short-term performance, it is with a sense of optimism that I survey the current landscape.
My review is a multi-dimensional process, first evaluating the magnitude of decline, and then factoring in the velocity of those movements. Adding in the fundamental economic overlay, one might conclude that despite a drawdown in market valuation, there is sufficient reason to be positive about sector rotation and a rebalance of asset allocation potential. As the national debt increases, for example, capital expenditures in infrastructure, healthcare and education lay the groundwork for profit potential, as well as economic expansion, within those sectors. Historically, then, today's negative news might be the harbinger of opportunity that the short-termers are missing in their myopia.
I cannot ignore that current short-term velocity in the market is a significant deterrent to investing in stocks, at present. Although one might postulate about longer term trends, the real poison is in the current negativity that investors feel about market performance, job security, declining home values, low savings, and high prices. Therefore, despite the potential that a turnaround in equity performance might bring, we must be realistic in assessing the potential for lower equity prices for the balance of this year.
Offering one false start after another, the markets give no sign that a turnaround is imminent. Said another way, I would be cautious about chasing devalued stocks because we don't know which bottom is for real. Instead, at the very least, I would focus upon earnings performers in sectors which heretofore have proven to have staying power, such as basic materials and consumer non-cyclicals. Also, I would look for yield in select utilities shares, if the share price has proven "immune" from short term fluctuation. The opportunity cost for sitting on the sidelines might be too great, especially if the enduring secular trend in those favored sectors continues to hold strongly against negative forces.
We know that news and exogenous events happen too quickly to try and "time" the market. Sometimes the intersection of cyclical, data, and secular forces happens faster than we are able to respond. That is why portfolio managers like me rely upon asset allocation and balance to project into the future. Indeed, we cannot predict with accuracy or certitude what the future might bring. But we can use our science and methodology to limit the extent of negative outside forces upon performance of our client's accounts.
Last year, we did this quite successfully. Already this year we have used portfolio allocation to mitigate the calamity which has been wrought by daily news and exogenous forces upon portfolio performance. As we await the drumbeat of response from fiscal and monetary stimulus proposals, it is important to maintain a steady hand upon the tiller. I do not anticipate any shift in negative bias in the shot-term. Therefore, expect more of the same for the coming week, and beyond.
I will, however, leave behind my negative bias to report that I see the opportunity for real return from equities as being at its greatest level in nearly a decade. This comes from my respect for "value investors" who believe that the cheaper the market gets, the better it looks. Combining our two fundamental approaches, and respecting that you don't want to buy stocks "on the way down", we both come to the conclusion that a bottom is imminent, albeit not yet here. Therefore, amidst all the gloom about short-term performance, it is with a sense of optimism that I survey the current landscape.
My review is a multi-dimensional process, first evaluating the magnitude of decline, and then factoring in the velocity of those movements. Adding in the fundamental economic overlay, one might conclude that despite a drawdown in market valuation, there is sufficient reason to be positive about sector rotation and a rebalance of asset allocation potential. As the national debt increases, for example, capital expenditures in infrastructure, healthcare and education lay the groundwork for profit potential, as well as economic expansion, within those sectors. Historically, then, today's negative news might be the harbinger of opportunity that the short-termers are missing in their myopia.
I cannot ignore that current short-term velocity in the market is a significant deterrent to investing in stocks, at present. Although one might postulate about longer term trends, the real poison is in the current negativity that investors feel about market performance, job security, declining home values, low savings, and high prices. Therefore, despite the potential that a turnaround in equity performance might bring, we must be realistic in assessing the potential for lower equity prices for the balance of this year.
Offering one false start after another, the markets give no sign that a turnaround is imminent. Said another way, I would be cautious about chasing devalued stocks because we don't know which bottom is for real. Instead, at the very least, I would focus upon earnings performers in sectors which heretofore have proven to have staying power, such as basic materials and consumer non-cyclicals. Also, I would look for yield in select utilities shares, if the share price has proven "immune" from short term fluctuation. The opportunity cost for sitting on the sidelines might be too great, especially if the enduring secular trend in those favored sectors continues to hold strongly against negative forces.
We know that news and exogenous events happen too quickly to try and "time" the market. Sometimes the intersection of cyclical, data, and secular forces happens faster than we are able to respond. That is why portfolio managers like me rely upon asset allocation and balance to project into the future. Indeed, we cannot predict with accuracy or certitude what the future might bring. But we can use our science and methodology to limit the extent of negative outside forces upon performance of our client's accounts.
Last year, we did this quite successfully. Already this year we have used portfolio allocation to mitigate the calamity which has been wrought by daily news and exogenous forces upon portfolio performance. As we await the drumbeat of response from fiscal and monetary stimulus proposals, it is important to maintain a steady hand upon the tiller. I do not anticipate any shift in negative bias in the shot-term. Therefore, expect more of the same for the coming week, and beyond.
Subscribe to:
Posts (Atom)