The Federal Reserve, liberally praised and/or criticized for its policies regarding expansion of the money supply is now falling victim to whispers about its virility to deal with a stagnant economy for the long term. Some have jumped upon the Board, and its Chairman, as being the enemy of a market torn between austerity and growth. While it is fair to lay blame upon them for an overly zealous monetary policy, the fault with the global markets must also be borne by politicians, business, and consumers.
The
deterioration of the market, in a quest for equilibrium by our policy-makers,
raises geopolitical interconnectedness to a new bar. The “on-the-ground” reality is that it’s not working
for the average consumer, who feels that the allocation of hope and opportunity
is unfairly distributed.
Given
this scenario, the prospect for earnings acceleration patterns in the next
quarter are quite low.
After
years of being pounded upon, many investors/consumers have just withdrawn. It is naïve to suggest that market
fundamentals are not impacted when a significant portion of the consumer base
doesn’t even play the game.
As
valuations go, P/E ratios might show some semblance of expansion, but that’s
because the denominator is getting smaller, or traders are speculating with
prices, driving them artificially higher.
Profitability
is being squeezed by a decline in top-line revenues and higher overhead. Forecasts continue to project a
less-than-robust jobs market for the next few months at least.
We
are still dealing, then, with the immutable laws of quantification, statistics,
and physics. Those “laws” indicate a static (lateral)
movement in stocks as a surrogate for upside momentum, and an even higher
probability that as stocks congest within their short-term attempts to rally,
they set in motion the potential for a decline (sell-off). The most positive thing one might say about
their stock portfolio today is that it has “done them no harm.”
Dismay.
Quantitative
analysts get headaches over markets like this because data doesn’t always
appear as “black” or “white.” Instead,
we review “degrees” of magnitude, a frame of reference that deals mostly in
integers, not point of view. There are no
absolute responses to data, only absolute data.
For
example, the deceleration in earnings about which I just wrote, creates
clusters of equities in various phases of growth cycles. Rather than focusing upon those securities
whose prices are low, I would prefer to find companies whose earnings/profits
are accelerating. Of course, who
wouldn’t? Well, you would be surprised
how difficult it is to match sector, cycle, inflection point and time to one
another.
Fundamentals,
which play a significant role in this analysis, are typically expressed as
integers but also interpreted upon a value scale. If the numbers seem “flawed,” or suspicious,
one might ignore them altogether. This,
in turn, evokes a “happy” or “sad” response to a company. Grudgingly, as a result, the markets take on
a psychological mania that can affect prices.
Fundamentals get ignored, opportunity wasted.
I
expect that the year-end will be rife with psychological mania of this kind,
yielding to an extremely volatile attention span. Despite the numbers, a new landscape is
emerging which trades upon “hype,” “happiness,” and “expectation.” It could cost us the opportunity to tune in
to dormant themes that might be next year’s capital gains winners, or,
possibly, to overlook them altogether while wallowing in excess negativity.
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