Last week’s market performance was “distracting,” at best. Spread amongst positive innuendo about the Eurozone austerity discussions and strength in the global oil markets, was consternation about contentious earnings reports and a build up in selling pressure upon equities whose values are bumping up against relative strength resistance points.
The
state of the financial markets is “net-neutral.”
The most important characteristic of the markets today
is the aging of intermediate recovery trends and the high number of equities
that amble along laterally. Any entry
into long term probabilities would be done today at high risk.
Despite
my expectations for slow near-term growth, it is undeniable that trends do terminate,
and that we are due a secular recovery at some point. However, as long as projections for low GDP
expansion continue, so too will the tepid opportunity in capital gains
potential. By all measures within my
screens, austerity and recession are more likely in the near term than is a
bull recovery, just yet.
We
tend to look at markets as a snapshot, not a big panorama. I believe it is vital to widen the aperture
of discovery so that we not only see today’s picture, but the trend qualities
and duration, as well. After all, without
this sense of perspective, an integer is simply a number, not a trend.
In/out.
And
trends are well under way, indeed.
Although the averages are “up” for the year (to date), we are below our
peak valuations of 2007, and still well defined by a secular bear within which
these bull responses are occurring. In
other words, the outcome is not predictable, but pretty well defined by
the context in which it resides.
Given the cheap cost of money and the expectation for
job creators to expand the market, we have to be disappointed by equity
performance thus far. The range-bound, lateral
configuration of most trends might make owning stocks a moderate risk exercise,
but does little to stimulate the imagination.
Taken in sum, the data (fundamentals) is simply not there to support the
theory of “all-in.”
I
remain committed, however, to an active asset allocation model which crosses
sector, region, and asset class to form a low-risk/high probability
system. There remains a number of unique
upside potential candidates (Healthcare, Energy, Technology), companies with a
track record of earnings expansion and relative strength within their industry
groupings.
At
the very least, these factors make for a constructive climate for building
positive alpha.
Money.
A significant
threat to equities is also posed by the credit crisis. The prospect of slower growth is a factor in
our market correction. Given that
inflation data is mixed, particularly in consumer prices, the biggest threat to
economic/market growth is indecision and lack of confidence. It’s no wonder investors are hitting the
panic button. They know low yields have
not been sufficient to create lending, threatening the stability of earnings
expansion.
While
employment has shown some signs of regeneration, the business recovery is not
translating into a “psychic recovery.”
In
other words, look for more of the same:
swings in prices, expectations, and volatility….but no trend reversals.
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