For many weeks, I have received feedback from readers of my commentary that I am “too negative,” “too pessimistic” in my views about the markets. While it is true that my objective quantitative science leaves little room for interpretation, let me dispel the notion that it is I, not my data, that is contemptuous of the “next move.”
In fact, I would argue that owing to the duration of
our bear market (whose origins date back over 5 years), the necessary elements
for a reversal in course are closer today than they were on day one of the
bear’s initiation. Both market valuation and
sentiment indicators have taken precipitous falls from their highs. A severe degree of pessimism is necessary for
the seeds of a bull market upside reversal to occur. Now that global policy makers are aware of
the level of investor disinterest and mistrust, they are slowly acting upon
policy which might reflate economies.
After all, how much lower can interest rates go before we consumers
begin to “drink from the trough?”
While
current demand for credit is slow, any increases in capital borrowings and
expenditures going forward would be a welcome sign.
Although we are still waiting for policies to evolve,
the potential now exists to push the trajectory of growth and spending
higher. Even the perception of
movement becomes movement, boosting interest and perhaps confidence in the
meantime. As such, my overall view remains
realistic, but cautiously optimistic, barring any exogenous turbulence. I would rather act to increase portfolio
valuations for my clients than to run and hide in a completely defensive
posture.
Gauge the opportunity.
The
biggest question, then, is the timing of more aggressive action, and from which
sectors does money have the best probability of generating gains? There is no doubt that we have seen a shift
from purely defensive categories into more aggressive opportunities in
Technology and Cyclicals. Favoring a
strategy of “cautious aggression” I have maintained a neutral weighting in
Utilities, while increasing exposure to those companies that demonstrate
consistent year-over-year earnings acceleration. This would imply more mature companies that
have non-cyclical market share. I also see
demographic, long-term shifts in agriculture, water, alternative energy and
healthcare equities.
It
is imprudent to load-up a portfolio on risk or hunch. As such, I still hold to the belief that
one’s asset allocation plays a greater role in the probability of portfolio
capital gains than does any individual security within that portfolio. Thus, at the appropriate time, I will
rebalance sector weightings, asset allocation, and security selection to
enhance portfolio performance.
On board.
The
key macro factor that needs to reverse, or stabilize, is investor confidence. For too long, many have felt that the game is
played unfairly by those who control the capital. A contagion of mistrust arose from that belief
and paralyzed the financial markets for five years. Relative and absolute performance diminished
during that time and placed all market variables under suspicion. These data interpretations can change,
seemingly overnight, and are changing even now for the better. But unless we buy-in to their
favorability, the markets will remain inert and range-bound.
Global
purchasing is attempting a comeback.
Inventories in select industries are expanding. Prices are bullish (inexpensive) and ready for
the taking. If banks would start
lending, there are dormant industries ready to expand.
The most appealing part of these conversations is that
sentiment indicators show that people want to opt back in, not to melt
away and forego the whole thing altogether.
That’s
enough hopeful empirical evidence, right there.
No comments:
Post a Comment