Market Commentary for the week of June 15, 2009

One step back.
Last week, global markets danced to an unsyncopated rhythm, as data about production, earnings, interest rates and equity valuations were digested as we near the end of this quarter. The lurches and turns we took were unsettling if not un-magnificent.

Investors are getting wary of this rally because nascent inflation probabilities appear on the horizon. The market wants recovery, it wants growth, but not at the expense of cutting off access to products if manufacturers and suppliers pass along any additional core costs. These type of projections ground the market to a halt last week.

Some see inflation as representative of a growth cycle, others see it as an exacerbation of negative influences.

In the wake of these discussions, the markets found no equilibrium and simply drifted in and out of positive territory. Maybe all the rain we’ve had lately has just soured everyone’s mood.

A new dynamic.
Inflation is not the enemy. Economic renaissance must be accompanied by some type of price pressure, or else manufacturing sees no justification for growing inventory. The influence of low interest rates upon economic growth in prior decades created a wild-west, “anything goes” ideology whose excesses derailed a generational expansion. As the tide turns, in the near future we’re going to have to live within a new paradigm of price pressure, slower earnings growth, and necessary (not discretionary) purchasing.

During the last decade, a “wealth effect” on tangible assets created a framework of irresponsible spending, lending, and investing, that characterized a climate of excessive expectations. Difficult to perceive at its inception, it became the hallmark of capital gains statistics for a generation of investors.

The market’s newly-found religion will be a marked difference from those years of greed. It was mind-boggling to comprehend decades of neglect of social issues (such as healthcare, infrastructure, crime, national defense, etc.) to satisfy personal gain and self-interest. A demographic re-thinking of priorities is required to sustain a next secular bull in stocks. Bond yields will be increasing. The last, best, buy in bonds occurred in the mid-1990’s. Higher rates, higher prices and inflation will become the three pillars of economics for the next generation of capital gains equities.

Open wide.
Analysts, similarly, must widen their focus from “bottom-up, self interest” to “macro, top-down altruism.” From that perspective it might become easier to quantify winners and losers, leaders and laggards.

This is not a “stock-du-jour” approach by any means. We must work a little harder to build asset allocation and securities’ selection that works not just for today, but for the longer term. In a climate of heightened suspicion and uncertainty it would be wise to consider the broader topography of our demographic themes, than merely what works over the next week, or month.