What constitutes a recovery? Is it simply the absence of negative news, or must it also imply a robustness of capital, capital gains, and euphoria.
It seems to me that we are currently in rejoice only
because the steady drumbeat of negative noise has abated somewhat. While it may foretell the redirection of a bear
market/economy, we cannot yet proclaim the regeneration of a secular bull
cycle.
Last
week I had occasion to discuss the tenor and tone of my market weeklies with a
client who pointed out to me that I seem quite negative, quite bearish. “Hardly the tone one wants to convey to one’s
clients,” she said. My response was to
point out an archive of my weekly commentaries in which it could be found that
my description of market fundamentals evolves over periods of time. In fact as recently as last spring our
average equity (stock) exposure in portfolios was about 55%, a rather bullish
stance for our balanced clients. Today
it is closer to 20%.
The
weekly missives are nothing more than a written representation of mathematical
data that derive from my proprietary algorithmic analysis. In quantitative studies there is no such thing
as a point of inflection, but rather a period of inflection
during which indications and confirmations are required. These periods might be generational,
seasonal, or weekly. The point is, I
don’t become bearish overnight or without statistical confirmation.
Look
around. Despite a resurrection of good
news, mostly year-over-year comparisons to 2011, there is much systemic
baggage, not sufficient to scale my models into a bull cycle. This is, after all, what makes markets. Some might wish to be “early” to a cycle; others might
“time” their entry or exit; still others might like to wait for repeated and
prolonged confirmation of a trend’s duration before making a financial
commitment. I manage money according to
the latter proscriptions.
While
I certainly do not wish to convey a “negative” connotation to my data…it is
what it is…the fact remains that today’s secular trend is down, despite recent
attempts to rally within that secular bear market.
Content.
Domestic
election year campaigning doesn’t help, either.
Combatants keep pointing out what’s wrong with the economy. Communication channels are filled with negative
news, creating a pessimistic point of view.
When dealing with human emotion and statistics, emotion usually
wins. In a climate of uncertainty, it
is harder to cut through the noise to arrive at certitudes which govern the
marketplace. The first, and last, thing to suffer is
discretionary spending.
While
we are, indeed, seeing pockets of advantage, the velocity of growth is somewhat
diminished by an overlay of poor confidence.
Our situation also is not unique to our shores. As I have written, the degree of
synchronicity and congruence with which all global bourses are struggling makes
for a built-in retardant to expansion. Global
austerity is to be lauded, but serves as the antithesis to unbridled spending
and enthusiasm.
Pressures
are modestly easing, and should for the next few quarters. Our legislators are, or should be, looking
for ways to match spending cuts with mobilization of the capital markets. If profits are the objective, there must be an
hospitable climate in which risk-taking can be encouraged, and better “mouse
traps” can be created. A better rhetorical tone might
also help to sustain rallies in the markets.
People need to be held accountable for their message.
Tactically,
I am keeping a significant percentage (30%) of cash available for reasonable
risk/reward opportunities in stocks. It
makes sense, however, not to jump in without confirmation, and to avoid rumor
or hyperbole. Altogether, I remain
“conservatively aggressive” until market fundamentals offer a period of tightening-up
the risk factors. There is upside potential, but I expect the rally to
weaken in the short run.
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