Market Commentary for the week of November 8, 2010

Gridlock, inertia, or hope?

Now that the U.S. election cycle is over, the most frequent question I am being asked is “how will the election results impact upon the markets and my portfolio during the next year?”

Firstly, let me dispel any notion that I am a political analyst, so my instinct when responding to that question is always to evaluate the data scientifically and unemotionally.  Besides, we are less than one week removed from the elections and it is yet to be determined how intentions might translate into actions.

But I can’t stress more strongly that my mandate is to respond to uncertainty with empirical know-how, to make discipline from events which seemingly are uncorrelated.  My thesis has always derived from the supposition that behavior and events are not random, that they can be quantified as to duration, magnitude, and sustainability of trend.  Further, I believe that these data can be organized, asset allocated, to create a macro, top-down landscape that is emblematic of broader generational themes.  In this regard, empirical or anecdotal events are neither Republican or Democrat, young or old, Western or Eastern, small cap or large cap.

Allowing for individual nuance of risk/reward tolerance, asset allocation plays a greater role in the probability of a portfolio’s capital gains performance than does any individual security within that portfolio.  Therefore, elections, Fed announcements, politics, or fiscal policy plays less of a role upon systemic long term secular themes than we would like to believe or are told we should believe.

Just facts.

What we do know is that the population of the globe is getting “older”; the infrastructure of many countries is either underbuilt or too archaic; that global debt is a burden upon economic revitalization; arable land is diminishing; potable water is a depleting natural resource; technology and innovation are bellweathers of a culture’s sustainability; confidence in traditional financial markets and delivery systems is at its lowest ebb in decades.

Before you indict me as being too negative, let me state that each of these “knowable data” are also potential opportunities for capital gains, investment generation, and economic renaissance.

Investors may differ about whether “stimulus provides jobs or tax cuts provide capital” but there is no doubt about confirmation of the problems, themselves.

Interestingly, the wider variance of opinion is about whether we define the time frame for solution-making as “long term generational” or “short term remediative.”  The wave of political aspirants in our current/next Congress would clearly be identified as the latter.

Forward, not backward.

My readers know that I am mostly “long-biased” and enthusiastic, despite my current readings of empirical data.  I am strongly in favor of innovation and research and development as engines of economic stimulus.  Real demand derives from building a better mousetrap, from which flows job creation, capital investment, inventory and sales expansion, revenue, and margin growth (profits).  Earnings drive stock performance.  It would follow that abundance of demand for new products drives earnings.

Markets depend upon the perception of fair play, confidence, and capital.  Bubbles of excess speculation or stimulus-driven valuations do not create sustainable earnings landscapes.  I would thus be looking at long-term themes as probable long term solutions to a dearth of current opportunity and confidence.