Now that the election is over, and the markets are oversold, the
As interest rates have been
manipulated into a zero-sum game, literally and figuratively, the only option
for converting cash into capital gains has become stocks.
But who is going to trade the
security of the fixed income markets for the volatility of owning stocks? And why must they? No one is forcing investors to make those
choices. Besides, in the real world that
I live in, both professionally and personally, navigation through the financial
landscape is not a question of either/or but of fine shadings and degrees of
risk-taking.
Why must one consider equities
today? Because a cornucopia of other
options is receding into smaller and smaller baskets, and most of those don’t
include traditional risk-averse vehicles such as CD’s and Treasury bonds.
Most problematic, though, is
that even as a climate of confidence widens, investor’s risk appetite has not
appreciably kept pace. The gap
between “feelings” and “actions” is narrowing, but not sufficient to
turn a wary stock market into a raging bull stampede.
But to be fair, that’s not how
the game works, anyway. Everything in my
universe is measured on a timeline that would make sprinters wince with
anxiety. “First one in” is not only a
motto, it is a funeral dirge when compared to the average investor’s expectations
for portfolio performance. In an age
of instant gratification, a five year reversal is intolerable. And to the intolerant I remind them that it
took years to bury ourselves in debt and greed, and it will take years to
replace them with patience and profitability.
Style versus substance.
The reasons for our expansion
in breadth are as much secular as they are micro. Industries which led the cyclical decline in
equities (e.g. Retail, Financials, Housing, Industrials) have “bottomed” and
are showing nascent signs of recovery.
Along with demand, earnings projections are also rejuvenating. If it can be said that low interest rates
fueled a greed-inspired excess in borrowing, it might also be argued that low
interest rates make stocks look more attractive for their potential capital
gains.
The uncertainty surrounding
micro-data (fiscal cliff, taxes) is already priced into the market, so rather
than being an obstacle, those data become an opportunist’s upside
probability. Recognizing that there
are very few “straight lines” in quantitative studies, the odds now favor a
protracted period of accumulation in equities, foretelling a longer cycle of
upside equity price mark-ups. In
particular, the U.S.
During the summer, I had been
writing that we were “closer to the end of a bear cycle than we were at its
initiation.” The obviousness of that
statement shouldn’t be overshadowed by the fact that we needed nearly three
years to complete that bear journey.
Perversely, it always looks bleakest from the bottom of the well, but we
only have “up” to go if, in fact, we are at the end of this bear market.
Any symmetry in the financial
markets is always slightly askew. When
we feel best, is always the time to look out for disaster. When we feel worst, good times are around the
next bend. Understanding the inverse
nature of market timing and psychology is just the first step towards using
that knowledge to prosper from one’s methodology and discipline. But it is a healthy sign that we pay
attention to empirical changes in policy, data, and current events than to let
mania and negativity ruin what might be an opportunity to profit from emerging
secular trends.
As with most things “Wall
Street,” there will always be a healthy skepticism of the industries’
motivation. In this case, let’s try to
be good stewards of our client’s needs for responsible capital gains and
security. If so, we might be turning a
corner from despair to guarded optimism.
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