As the dust settles from the
1000 point “mistake” two weeks ago, two things are increasingly clearer: (1)
the market was poised for a fall due to excess valuation created during the
preceding year’s bull upleg (2) the congruency of sector decline leaves few
“safe havens” from which to find countercyclicality. As a result, it’s necessary to reset and
recalibrate portfolio, economic and market expectations.
I have written previously that
exuberance during the linear uptrend of 2009 was misplaced because that
“straight line” simply represented a response to the credit debacle of
2008. Recall that nearly all global
equities and all global baskets were starting from such a magnitude decline
that seemingly every category of financial instrument was at an equilibrium
near metaphorical “zero.” Therefore, an
upside response was predictable, necessary, but not sustainable from
fundamentals.
Similarly, we reached an
untenable upside inflection point at the beginning of April (2010) which
foretold of a possible downwards redirection.
All this, within an existing secular bear market from which we haven’t
been able to escape since mid-2007. Did
you expect anything else but a new bear leg?
Strategy.
It’s not trivial, either, that
there is such congruence amongst market sectors towards a downside bias. Underlying fundamentals might be changing
anecdotally from bad to not-so-bad, but there is less indication that uniform
demand exists from the consumer sector. Common sense would lead us to believe that
absent a robust employment, wage, and saving base, the economy will improve at
a slower pace, in fits and starts, and be relegated to
themes/industries/companies that have high demand and top line revenue growth.
So, is the market at a secular
turnaround, a pause, or a short-cycle correction? Yes to all three.
Total return.
Multiple expansion potential
is limited by the fundamentals I described above, as well as quantitative
“inflection points” that show more distribution
than accumulation. Given that the variables are aligning
negatively, the next cycle in stocks is probably down and broadly inclusive.
Much has been written about a
global economy. Unfortunately, a
syncopation of credit defaults, social unrest, and excess spending is washing
westward and turning expectations for mature markets negative. As
goes our potential buyers, so goes our economic fundamentals.
Business, and market, cycles
are fluid. They ebb and flow even as our
expectations might wish otherwise. The
patterns I see are consistent with an aging marketplace not entirely of our own
making but with commonality to a global realm.
It will take ingenuity to find patterns of outperformance in a climate
of debt disasters and tighter credit.
It can be done.
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